What is a spread? In VSA, a spread is the distance between the bar’s high and the low within a timeframe being analyzed. Normally, a set of bars are analyzed against one another for comparison. If a bar has a large spread, it usually provides clues to the smart money’s buying or selling. On the same note, a small spread next to these large spread bars give hints to the smart money’s willingness to hold or exit their current positions. Grouping several bars together provide a bigger picture of the possible intentions of the specialists, market makers and insiders.
 
Here are the basic rules on analysis:

1.    Increased volume on up-moves indicates bullish smart money and increased volume on down-moves indicate bearish smart money. This is common sense; higher prices are pushed by buying volume. Prices moving higher without increased volume show no interest from specialists, institutions or smart money.
2.    Decreased volume on down-moves indicates lack of supply and decreasing volume on up-moves indicates lack of demand. Lower prices are helped by selling volume. Lack of volume while prices are moving down shows supply is decreasing. Smart money, institutions, and specialists are not participating.
3.    If there is a bar with a wide spread (lengthy high and low) accompanied by high volume, this bar is analyzed to find how much of the possible smart money is in the volume of this bar.


Figure 1 Wide Range Bars

4.    If the following bar closes below the previous bar’s close but in the middle or higher of its own bar, then smart money has been detected.
5.    Extremely high volume is considered a negative not a positive to the advancement of the trend. Looking at opening gaps as an example. These gap bars with high volume are well over 5 to 10 to 20 times greater than their average daily volume and are considered unhealthy trend. The move should have steady high volume, not explosive volume.



Figure 2 Extreme Volume

6.    While the opening is not important the close is extremely important. This shows how important shadows are in VSA.
    


Figure 3 Long Shadows
    
7.    When the bar has a small spread, volume plays an important role in determining supply or demand. This is an early indication if the thrust of the previous bars (with large spreads) will have follow-through or not. If the bar closes in the middle or on the opposite side of where thrust, then there is the possibility the top or bottom is near.



Figure 4 Narrow Range Bars

8.    The test is by far the most important part of VSA, a revisit near the lows or the range off the lows hint at where the smart money may want to be, up or down.

The next article will go into further details with examples on how VSA is applied.



© Copyright 2008 by MrSwing.com