Volume Spread Analysis (VSA) methodology looks at the relationship between price, spread or range, and volume. VSA is a proprietary market analysis method conceived by veteran trader, Tom Williams, who was a highly successful member of a professional trading syndicate in the 1960s. The VSA method works particularly well at highlighting the imbalances of supply and demand.
VSA seeks to establish the cause of price movements, and from that, predict the future direction of prices. The ‘cause’ is quite simply the imbalance between supply and demand in the market, which is created by the activity of professional operators. It is the close study of the reactions of these specialists - market maker professionals, or ‘Smart Money’ - which will enlighten you to future market behavior.
VSA looks at the interrelationship between three variables on the chart in order to determine the balance of supply and demand and the probable near- term direction of the market. These variables are:
The ‘Smart Money’ operating in the markets is very much aware of the emotions that drive YOU and the uninformed traders or investors, in your trading. Why do the members of the self-regulated exchanges around the world like to keep true volume information away from you as far as possible? The reason is because they know how important it is in analysing a market! The significance and importance of volume appears to be little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of technical analysis. To use a chart without volume data is like buying an automobile without a gasoline tank.
Price and volume are intimately linked, and the interrelationship is a complex one, which is the reason Volume Spread Analysis was developed in the first place. Ultimately it means that all other factors - including the fundamentals of a company, the management, the strength of the dollar and interest rates, simply aren't important in your analysis. Ditto for newspaper financial columns, investment journals, broker recommendations and television coverage.
The only truly important consideration for you is what the professional money is doing - that is the only thing that matters.
Volume in FOREX
One of the questions we get asked most often is whether the Trading Package works in the FOREX markets as there is no centralised volume.
The answer is yes! This is because Volume Spread Analysis uses relative volume – the volume on the current bar compared with the volume on the optimum number of previous bars. We know that the vast majority of the volume is professional money, so if the volume we are analysing is only 10% of the actual volume, we can still perform effective volume analysis because we know that the vast majority of that is “Smart Money”.
If you compare the VSA analysis on spot FOREX with the same currency pairs in the currency futures markets, the results are uncannily similar.
Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options futures or forex); therefore, you should not invest or risk money that you cannot afford to lose.