Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.

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Volume Spread Analysis in Trading

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Volume Spread Analysis (VSA) in Trading

In this article, I will discuss Volume Spread Analysis (VSA) in Trading. Please read our previous article, in
which we discussed Volume Price Action Analysis in detail. At the end of this article, you will understand the
following pointers.

1. What is Volume Spread Analysis (VSA) in Trading?

2. How Do We Use Volume Spread Analysis in Trading?
3. Market structure with respect to volume spread analysis.
4. Volume Spread Analysis.
5. Selling Climax.
6. Stopping Volume.
7. How do you trade based on selling climax and stopping volume?

MARKET STRUCTURE With Respect To Volume Spread Analysis

Let us understand bullish trend formation. The bearish trend turned into a bullish trend

Price goes through 4 phases. These are

PhaseA. Stopping the previous bearish trend
PhaseB. Construction of the cause (accumulation)
PhaseC. Test for confirmation (testing supply after accumulation)
PhaseD. Bullish Trend out of range.

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

We will come to this market structure later. Just understand the overall concept.

How to analyze volume activity in the chart

1. Through volume price action(VPA) (discussed in the previous article)

2. Through volume spread analysis(VSA) (we will discuss in this article)

Let’s understand how to differentiate different types of volumes, like

1. Average volume
2. Below average volume
3. High volume
4. Ultra-high volume

Now, we have four types of volume. Let’s find out in the chart

Volume always moves in a cycle.

Rule -: You can visually compare Mountain Peaks to identify volume peak structure. The key is to understand
the structure of the peak clearly. Volume peak has the following characteristics:

Rising Volume — Peak (Highest Point)— Falling Volume

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

Average and Above Average Volume: Above Average Volume is the Highest Volume in the current session,
which is higher than the average volume but lower than the previous peak Volume. Average Volume is the
volume that coincides with the Moving Average 20 of the volume indicator.

High volume and Ultra-high volume: high volume equals the previous pick volume. Ultra-high volume is the
Highest Volume in the current session. It is higher than the previous peak volume.

Bearish and Bullish Volume

Bearish Volume is marked in Red, and it shows bearish activity. Bullish Volume is marked in green, and it shows
bullish activity. If demand volume is greater than supply volume, then overall bullish volume

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

VOLUME SPREAD ANALYSIS (VSA) in Trading

In volume spread analysis, a few facts are required for chart analysis. These facts are:

1. price movement,
2. volume(the intensity of the trading)
3. the relationships between price movement and volume (harmony or divergence)
4. the time required for all the movements to run their respective action

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

Components of volume Spread Analysis:

1. The Volume (i.e., activity),

2. The Spread (i.e., the range of the price bar)

3. The Close (the closing price of the current bar)

Spread: Spread is the difference between the Opening and closing of the price. See the diagram below for
further illustration.

Volume: Volume is the activity of the frequency of transactions of the price change during a specified period of
time.

Close: Close price tells us where the balance point is at the end of the period.

Upside move with respect to volume

1. The smart money has no interest in the upside – Low volume.

2. Smart money is selling into the public buying – Higher volume.

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

Read Part1 and Part2 for a better understanding

SIGN OF STRENGTH BASED ON VOLUME SPREAD ANALYSIS

Recall the market structure that we have discussed above

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

Sign of strength means. The stopping action of the downtrend

Phase A. Stopping the previous bearish trend (the sign of strength)

Again, recall the volume interpretation

• Smart money has no interest in the upside – Low volume.

• Smart money is selling into the public buying – Higher volume.

• The ultra-high volume-the classic trap of “Smart Money

Now, we have found two important rules for volume spread analysis

• Rule Number 1-- Weakness appears on an Up candle. Supply when it comes, it comes on an up
candle.
• Rule Number 2-- Strength Appears on a Down candle. Demand when it comes, it comes on a down
candle.

Some volume spread analysis that suggests the end of the downtrend. These are

1. Selling climax
2. Stopping volume

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

3. End of falling market

Now, we will discuss these 3 pointers

What is a selling climax?

This condition marks the end of the approaching end of a particular downtrend. This panic selling by retailers (or
the public) creates an extreme expansion of the price spread and an expansion of the volume. This action may
occur over one day or over several days, which is matched by buying (demand) of:

1. experienced smart money

2. large interests

The classic characteristics of a selling climax:

• There must be a trend to reverse. (after a significant extended down move on the time frame of interest )
• The trend will accelerate to the downside with wide spreads down, closing in the middle or high.
• Volume expands dramatically
• Often occurs one more than one bar
• Must be tested for entry

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

A secondary reaction generally follows a selling climax. Why?

Two possible outcomes after selling climax

1. Either the professional money is BUYING into the SELLING [see the end of a DOWN market].
2. There is a trading range OR technical support level to the left and. (trend continuation)

Let’s first understand a trend continuation after selling the climax.

If buying during the Selling Climax was principally to support prices temporarily and check a panic or relieve a
panicky situation, this support stock will continue after a technical bounce from support. If price supply is
sufficient to drive prices through the lows of the climax day and bring about a new decline, that is a resumption
of liquidation.

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

Trend reversal after selling climax

After a technical rally, if prices test the climax low with decreasing volume and hold around or above the climax
lows, then we have an indication of support and the completion of liquidation. This tells us that there is no selling
pressure or supply (i.e., no more sellers), which is an obvious conclusion that the market will rally, as shown on
the right side of the image.

If the ‘test’ is successful, we can expect higher prices, especially if the test is on low volume and narrow spread
down bar into the same area where you first saw the very high volume. This is a strong BUY signal.

Time To Buy The Market AFTER TEST

1. Look for selling climax.

2. Wait for the successful test(lower volume and narrower spread)OF selling climax day low.
3. Any reversal candlestick pattern(like engulfing or outside bar or pin bar)
4. Buy above that candle
5. STOP LOSS below the low

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

Stopping volume

What is stopping volume?

• To stop a down move, demand has to overcome the supply

• It is the volume of smart money coming into the market and stopping it from falling further
• What is happening is that the weight of the selling pressure has become so great at this point that even
the smart money moving into the market has insufficient muscle to stop the market from falling in one
session. It takes two or three sessions for the brakes to be applied and is like our tanker.

Characteristics of stopping volume

• Demand overcoming supply

• Occur after an extended down move
• Volume expand significantly
• Bar close-mid or high and body narrow (lower shadow)
• Often occurs one more than one bar. The first bar close may be low 2nd bar close-mid or high

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

Two possible outcomes after seeing the stopping volume

If the volume had represented SELLING, how can the spread be narrow? Only two possible outcomes exist for
a narrow spread DOWN-day on a very high volume.

1. Either the professional money is BUYING into the SELLING [see the end of a DOWN market].
2. There is a trading range to the left, and the professional money is prepared to absorb the buying from
traders from the support region.

Trend continuation after seeing stopping volume

This topic will be covered in the next separate article

Trend Reversal After Seeing Stopping Volume

After seeing the stopping volume. If the ‘test’ is successful, we can expect higher prices, especially if the test is
on low volume and narrow spread down bar into the same area where you first saw the very high volume. This
is a strong BUY signal.

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Volume Spread Analysis (VSA) in Trading: A Comprehensive Guide https://dotnettutorials.net/lesson/volume-spread-analysis-in-trading/

How do you trade after seeing stopping volume?

Time To Buy The Market AFTER TEST

1. If the day closes on the lows, you must wait to see what happens next.
2. If the next day is level or up, this must surely show buying on the previous day.
3. wait for the market to come back down into the area of stopping volume on LOW VOLUME narrower
spread
4. The time to buy the market is when we begin to trend up As the trend begins. Any reversal candlestick
pattern (like engulfing or outside bar or pin bar). This shows us that there are no sellers or no Supply.
5. Buy above that candle.
6. STOP LOSS below the low

In the next article, I will discuss Reversal Candlestick Pattern Analysis in detail. In this article, I will try to
explain volume spread analysis in trading. I hope you enjoy this article. Please join my Telegram Channel,
YouTube Channel, and Facebook Group to learn more and clear your doubts.

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About the Author: Pranaya Rout

Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout
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