What is Volume Spread Analysis? – Know the Key Concepts

Introduction

Volume Spread Analysis (VSA) is a technical analysis method that uses volume, or the number of trades being made, to identify the strength of a particular trend or the likelihood of a trend reversal. It is based on the idea that the volume of trades can reveal information about the underlying supply and demand of a particular asset and help traders make informed decisions about their trades.

The Three Key Factors

There are three key factors that are important to consider when using Volume Spread Analysis:

1. Volume: The volume of trades being made can provide insight into a particular asset’s underlying supply and demand.
2. Spread: The spread, or the difference between the bid and ask prices, can indicate the presence of a particular trend or the likelihood of a trend reversal.
3. Range: The range, or the difference between a particular asset’s high and low prices, can provide information about the strength of a particular trend.

Market Phases in Volume Spread Analysis.

Volume Spread Analysis can be used to identify the four critical phases of the market: accumulation, mark-up, distribution, and mark-down.

1. Accumulation: During the accumulation phase, the volume is low and the price is range-bound, indicating that traders are buying and holding onto the asset.
2. Mark-up: The mark-up phase is characterized by a rise in volume and a rise in price, indicating that traders are bullish on the asset and are willing to pay higher prices for it.
3. Distribution: The distribution phase is characterized by a drop in volume and a drop in price, indicating that traders are selling off the asset and taking profits.
4. Mark-down: The mark-down phase is characterized by low volume and a decrease in price, indicating that traders are bearish on the asset and are not willing to pay higher prices for it.

Components of Volume Spread Analysis

Volume Spread Analysis uses four types of volume bars to identify trends and trend reversals:

1. Low volume bar: A low volume bar indicates that there is little interest in the asset and that the trend is likely to continue.
2. Average volume bar: An average volume bar indicates that there is some interest in the asset but not enough to impact the trend significantly.
3. High volume bar: A high volume bar indicates that there is strong interest in the asset and that the trend may be coming to an end.
4. Very high volume bar: A very high volume bar indicates that there is extremely strong interest in the asset

Bullish Volume

Bullish volume occurs when the volume of trades is higher on a day when the price of an asset is increasing. This is a sign of strength in the trend and may indicate that the trend will continue.

Bearish Volume

Bearish volume occurs when the volume of trades is higher on a day when the price of an asset is decreasing. This is a sign of weakness in the trend and may indicate that the trend is coming to an end.

Chart Reading Using Volume Spread Analysis

Volume Spread Analysis (VSA) is a technical analysis tool that can be used to read charts and identify trends and trend reversals in the market. It works by analyzing the volume, spread, and range of an asset and looking for patterns in these factors. By looking for these patterns, traders can determine the underlying supply and demand of an asset and make informed decisions about their trades. When using VSA to read charts, traders should look for patterns in the volume, spread, and range to identify the presence of a particular trend or the likelihood of a trend reversal. By understanding how to use VSA to read charts, traders can increase their chances of success and improve their trading performance.

There are a few tips traders can follow to effectively use Volume Spread Analysis (VSA) and make good trades while minimizing the risk of loss.

1. Focus on higher timeframes: It is generally recommended to use VSA on higher timeframes, such as daily or weekly charts, as this allows for a more accurate analysis of the underlying supply and demand.
2. Look for confirming signals: When using VSA, it is important to look for confirming signals from other technical indicators or chart patterns. This can help to increase the reliability of the VSA analysis and improve the chances of success.
3. Use stop loss orders: Stop loss orders are a useful tool for minimizing the risk of loss when trading with VSA. By setting a stop loss at a predetermined level, traders can limit their potential losses if the trade does not go as expected.
4. Practice risk management: It is important to practice good risk management when using VSA to trade. This can include setting appropriate position sizes and using stop-loss orders to limit potential losses.

By following these tips, traders can effectively use VSA to make good trades and minimize the risk of loss.

What is the Volume Cycle?

Volume cycle refers to the pattern of volume over time and can provide insight into an asset’s underlying supply and demand. When the volume cycle is increasing, it may indicate that the trend is strong and likely to continue. When the volume cycle is decreasing, it may indicate that the trend is coming to an end.

How Does Volume Spread Analysis Work?

Volume Spread Analysis identifies patterns in an asset’s volume, spread, and range and uses these patterns to make informed decisions about trades. By analyzing the volume of trades and an asset’s underlying supply and demand, traders can identify trends and trend reversals and make informed decisions about their trades.

Detailed Volume Spread Analysis Trading Strategy:

To trade using Volume Spread Analysis, traders can follow these steps:

1. Identify the key factors: Look for patterns in the volume, spread, and range of an asset to identify the presence of a particular trend or the likelihood of a trend reversal.
2. Determine the market phase: Use VSA to identify the market phase, whether it is accumulation, mark-up, distribution, or mark-down.
3. Enter the trade: Once the trend or trend reversal has been identified, traders can enter a trade in the direction of the trend.
4. Set a stop loss: To protect against potential losses; traders can set a stop loss at a level below or above the entry price, depending on the direction of the trade.
5. Set a take profit: Traders can set a take profit at a level where there is likely to be resistance or support, depending on the direction of the trade.

Conclusion

In conclusion, Volume Spread Analysis is a powerful technical analysis tool that can be used to identify trends and trend reversals in the market. By analyzing an asset’s volume, spread, and range, traders can make informed decisions about their trades and increase their chances of success. While VSA requires a certain level of skill and experience to use effectively, it can be a valuable tool for traders of all levels. By understanding the key factors and market phases of VSA and following a detailed trading strategy, traders can use VSA to increase their profits and minimize risks.