What is Volume Spread Analysis?How Its Work, Component and Example

In the intricate world of trading, identifying the underlying forces driving price movements can provide a significant edge. Volume Spread Analysis (VSA) stands out as a powerful technical analysis methodology that transcends traditional chart patterns and indicators.

Originating from the insightful work of Richard Wyckoff, VSA aims to decipher the actions of “smart money” – the large institutional traders – by meticulously analyzing the relationship between price, volume, and the range (or spread) of a trading bar. By understanding these dynamic interactions, traders can gain valuable insights into potential market direction and pinpoint higher-probability trading opportunities.

what is Volume Spread Analysis?

At its core, VSA is a technical analysis tool that examines price charts through the prism of traded volume and the price bar’s spread to interpret the prevailing balance of supply and demand. Unlike many indicators that solely focus on price action, VSA uniquely integrates volume to reveal the conviction – or lack thereof – behind price movements.

This distinctive approach empowers traders to potentially discern the often-hidden activities of institutional traders – the major players whose substantial trading volumes can significantly influence market trends.

By scrutinizing volume in relation to the price bar’s range, VSA seeks to determine if observed price movements are driven by genuine buying or selling interest, or if they are potentially manipulative maneuvers orchestrated by larger entities.

How Volume Spread Analysis Works?

How it works is grounded in a fundamental concept: the principle of effort versus result. In the context of trading, “effort” is represented by the volume of transactions during a specific period, and the “result” is the ensuing price movement, reflected in the spread of the bar.

Ideally, significant trading volume should correlate with a substantial price movement in the direction of that volume. Conversely, if there is high volume but only a minimal price change, it can suggest a potential imbalance between supply and demand, often hinting at a future shift in the prevailing trend.

Component of VSA

VSA meticulously analyzes three key elements for each individual trading bar:

• Volume: This metric quantifies the level of buying and selling activity during a specific time interval. High volume typically indicates strong interest and conviction, while low volume often suggests a lack of significant participation. Analyzing volume involves comparing the current bar’s volume to that of preceding bars to gauge relative activity.
• Spread: The spread, or range, of a price bar represents the difference between its highest and lowest traded prices during that period. A wide spread signifies substantial price volatility and potentially strong buying or selling pressure. Conversely, a narrow spread suggests a period of consolidation, indecision, or relatively balanced supply and demand.
• Close Position: The location where the price closes relative to the bar’s overall range provides crucial contextual information. For an upward-moving bar, a close near the high typically indicates sustained buying pressure throughout the session. Conversely, a close near the low of an up bar might suggest that buying interest waned by the end of the period. The opposite interpretations apply to downward-moving bars.

How to Read Volume Bars Effectively

Knowing how to read volume bar charts within the VSA framework is paramount. It’s not simply about observing high or low volume in isolation; the real insight comes from analyzing volume in conjunction with the corresponding price bar’s spread and where it closes.

Begin by comparing the volume of the current bar to the volume of the preceding bars. Is it notably higher, significantly lower, or roughly in line with the average? Next, examine the spread of the current bar. Is it unusually wide, exceptionally narrow, or somewhere in between? Finally, meticulously observe where the bar’s price closed within its high-low range.

For instance, consider a scenario where you observe a bar with high volume but a narrow spread, particularly after a substantial price advance. This pattern can indicate potential absorption by larger players. It suggests that while there was significant trading activity (high volume), the price didn’t move much (narrow spread), implying that smart money might be absorbing selling pressure without allowing the price to decline significantly. This can be a crucial signal for a potential future upward price movement.

Cracking the Code

How VSA reflects smart money behavior lies in its ability to potentially reveal the deliberate accumulation or distribution activities of large institutional traders. These influential “smart money” players often need to enter or exit substantial positions without causing significant adverse price movements. They achieve this through strategic buying or selling during periods of apparent low volatility or by absorbing opposing trades.

VSA helps to potentially expose this often-hidden activity by highlighting instances where the relationship between volume and price action deviates from what might be expected in a market primarily driven by retail traders. For example, strong buying by smart money during an accumulation phase might not immediately trigger a sharp price increase but will manifest in specific volume-price patterns that VSA aims to identify. Similarly, distribution by large players might occur during a period of seemingly bullish price action, with volume patterns providing tell-tale signs of their selling pressure.

Signs of Strength in VSA:IdentifyingBuying Opportunities

Recognizing signs of strength through VSA can offer valuable insights into potential buying opportunities. Here are some commonly observed bullish VSA patterns:

• No Supply: This pattern typically occurs after a downward price movement where an up bar exhibits exceptionally low volume. It suggests that sellers are exhausted, and there is minimal resistance to a potential upward move.
• Test Bar: Often observed following a No Supply bar, a Test Bar is a down bar characterized by low volume. It represents an attempt to test if selling pressure is still present in the market. If the subsequent bar moves upwards, it often confirms the absence of significant supply.
• Stopping Volume: This bullish signal is characterized by a wide-spread down bar accompanied by very high volume, often appearing at the culmination of a downtrend. It suggests that significant buying interest has entered the market, effectively halting the downward momentum.
• Wide Spread Up Bar with Strong Close: This is a classic bullish signal indicating strong buying demand. The bar exhibits a wide price range and closes near its high, typically accompanied by higher-than-average volume, signifying strong conviction.

Spotting Potential Selling Opportunities: Signs of Weakness in VSA

Conversely, identifying signs of weakness can help traders recognize potential selling opportunities. Some common bearish VSA patterns include:

• No Demand: The counterpart to No Supply, this pattern appears after an upward price movement where a down bar shows exceptionally low volume. It suggests a lack of sustained buying interest to support further upward movement.
• Upthrust Bar: This bearish signal occurs when a price bar moves to a new high (or tests a significant resistance level) but then closes near its low on relatively high volume. It indicates that smart money likely sold into the strength.
• Supply Coming In: This pattern is characterized by a wide-spread down bar with high volume appearing after an uptrend. It strongly suggests that significant selling pressure has entered the market, potentially reversing the upward trend.
• Wide Spread Down Bar with Weak Close: This bearish signal indicates strong selling pressure. The bar exhibits a wide price range and closes near its low, typically accompanied by higher-than-average volume, signifying strong selling conviction.

What is the buying climax in VSA?

A Buying Climax happens when there is a sharp price rise on high or ultra-high volume, but the price closes in the middle or lower part of the bar. This suggests that although the market is rising, smart money is selling (distributing) into the demand created by retail buyers.

At the top of a strong uptrend, average traders rush in, fearing they’ll “miss out.” But smart money, which bought much earlier, sees this as an opportunity to sell their positions.

How it looks on a chart:

• Wide up bar
• Very high volume
• Price closes off the high (middle or low of the bar)
• Followed by weak price action (low volume up bars or immediate down bars)

What it means:

• Market may reverse downward
• It’s a sign of weakness
• Avoid buying here; look for shorting opportunities or exit long positions

What is Selling Climax ?

A Selling Climax occurs after a strong price decline, when a down bar shows very high volume but closes in the middle or high part of the bar. This indicates that smart money is buying while the crowd is panic selling.

Why does it happen?

At the bottom of a big fall, retail traders panic and sell due to fear or bad news. Smart money steps in to absorb the selling, building long positions at cheap prices.

How it looks on a chart:

• Wide down bar
• Very high volume
• Price closes off the low (middle or high of the bar)
• Often followed by tests or small down bars on low volume

What it means:

• Market is likely to reverse upward
• It’s a sign of strength
• Good time to look for buying opportunities

Buying Vs Selling Climax

Feature	Buying Climax	Selling Climax
Market Context	End of Uptrend	End of Downtrend
Bar Direction	Up Bar	Down Bar
Volume	Very High or Ultra High	Very High or Ultra High
Bar Close	Middle/Low of the bar	Middle/High of the bar
Meaning	Smart money is selling	Smart money is buying
Implication	Expect downward movement	Expect upward movement