Part I – Volume Spread Analysis [Smart Money Secrets]

Nifty VSA Volume Profile Charts

Hello traders welcome to GTTE, I am Dean and I am going to take you through my trading journey and how I came across aka VSA…

I promise you will learn how you can use Volume Spread Analysis in your trading by the end of this post!

But first…

Listen to this cool little story, a friend of mine who is a broker tells me about what traders talk about in the trading rooms, here are few of the oft-repeated things…

“The moment I buy market turns down, as if, the market was waiting for me to buy. The market is trying to get me every time I put on a trade!”

“Whenever I try to catch a trend, it just stalls and goes sideways. I mostly buy options and that is not a good thing for me as the time value just evaporates.”

“No matter how hard I backtest the moment I spot a pattern developing and put on a trade, that is the exact instance when the pattern fails!”

Sounds familiar…

My friend tells me they come in day in and day out and their discussions also remain the same. So what is wrong with this picture? Is it really so that market is waiting for traders to enter and then get their stop losses?

Well if you ask me I would say, markets don’t give a damn about what you are doing. It actually should be the other way round. “But these guys never learn.”, as my friend would say.

You may wonder…

Why is it that despite losing trade after trade, these traders cannot make a change. Even after seeing one system failure after another, they still chase the latest fad in town. Or is it possible they don’t know what they are doing wrong?

Well, this is not the problem for a few traders almost every trader has gone through this phase. Trust me I went through it too.

So what did I do to come out of this rut?

You might think I would have taken one of the following routes,

  • Kept detailed records of my trades.
  • Kept a trading journal.
  • Controlled my emotions.
  • Made a list of rules for entry and exit, and on and on…

Well, none of that, sometimes the most proffered solution won’t work. In fact, I had tried all these things and still failed. So what changed my trading around? It was a simple question actually…

Listen to this…

One day after seeing my stop loss getting hit, completely frustrated I asked myself, actually I shouted out of agony – “Who the fuck is taking the other side of my trades?”

Well, I asked the question and gave the answer as well. A light bulb went on in my head and I found something to dedicate my efforts towards. I set out to find who was taking the other side of my trades, all this time?

Volume Spread Analysis the saviour!

And that led me to the works of legendary trader Tom Williams, the founder of Volume Spread Analysis!

He always talks about the smart money. He says they are always trying to get you out of good positions or trap you into bad ones. Suddenly I could see all my bad trades moving in front of my eyes like a movie.

As I went deeper into his works I found that Smart Money or SM thrives on traders like me and they count on traders like me making every single mistake, that I made in my trading.

So was there a way out? Definitely! Although what I share below is only a part of the total solution that I use it will help you put things into perspective.

The way out was trying to figure out what SM was doing and I started out exploring this possibility using .

So what is VSA, as you all know its Volume Spread Analysis and we use the range of the bar, the associated volume and the position of the close to understanding what the SM is doing. Still, it is not only about the “signals” as Tom would call it, as much as it is about understanding the markets!

So let’s look at an example of how VSA charts can help us out in finding what the SM is actually trying to do. Just go through this small video on how the SM uses various tricks to trap the gullible traders like me, well not anymore, as I am now using the same principles to find my trades.

Volume Spread Analysis [VSA] – Video Example

Ok, a cool video wasn’t it… don’t forget to share it with your friends! Go back right now if you have not done so already!

How do you go about trading with SM with VSA?

So how can you use this way of analyzing the markets? How can you take trades like the legendary trader Tom Williams would have? Can you really trade alongside the Smart Money?

We are coming out with a detailed course on VSA pretty soon. If you want me to ping you when it is ready for release, just early bird list below to show your interest!

VSA Indicator

That is not all since you have read all the way to the end I am going to give a small gift. If you use Amibroker (most popular software) then you can use the AFL below to plot these awesome VSA signals.

Now, these signals are not all that there is to Volume Spread Analysis, but these are the ones I use most of the times in my trading.

Alright then, I hope you have got a fair idea as to what Volume Spread Analysis is all about. You will get much more through the VSA course we are coming out with.

In the next part, you will see how I took the next step in this journey and came across Market Profile!

Read the next part here…

How to use VWAP for timing your trading entries and exits?

What is VWAP?

VWAP is Volume Weighted Average Price – guess you all might be aware of this by now. What it means is basically the average or median price of days trading range based on volume.

Now this mean price acts as a magnate in sideways days and as support in case of a trending move.

Derivatives Trading involves substantial risk of loss, therefore, is not suitable for all investors. Past Performance is not necessarily indicative future results – Read Full Disclaimer

Examples

Let’s look at an example for each case.

VWAP as a Magnate in Sideways Markets

VWAP
Reversion to Mean Buy

In the first chart, we can see that the down move was exhausting because on every break Smart Money was stepping in and buying resulting in a  sideways move.

This action combined with a Wyckoff Spring prompted a potential long scalp for the test of the mean.

As the sellers were getting exhausted there was a possibility that mean will act as a magnet and attract price. That’s precisely what happened, actually, prices went overboard. Because VWAP acts as a magnate it did not allow prices to move too far away from it.

VWAP
Multiple Mean Reversion Trades

In the second chart, we can see 3 occasions when VWAP acts as a magnet. Every time the price strays too far away from the mean, it pulls it back. In the process, we get 3 nice scalps out of the markets.

Now, this may seem very easy in the hindsight, but because of the volatility that Nifty shows intraday, it is very difficult to execute it every time.

Thankfully you can combine this with Order Flow Charts and some Context from Market Profile to give your trade higher probability of succeeding.

VWAP acting as a Support in Trending Markets

VWAP
Offering Support in a Trend

In this daily chart, you can see I am using the Monthly VWAP. I am using this chart because I want to show you that this thing works on all time frames.

As seen on the chart there are multiple occasions when it provides support to falling prices.

As the trend is clearly up the best strategy is to buy breaks, and VWAP helps us do that effortlessly.

 

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How To Select Correct Strategy to Trade Wyckoff Market Cycle Phases?


Richard Wyckoff Market Cycle Phases  is one thing which has helped me distinguish different phases in a market. Sometimes markets are trending, some times they are trapped in a range and some times they are just pausing before they resume original trend. With Richard Wyckoff Market Cycle Phases I can now prepare for the change in phases of markets. And these changes have a definite pattern.


Derivatives Trading involves substantial risk of loss and is not suitable for all investors. Past Performance is not necessarily indicative future results – Read Full Disclaimer


What are the Different Richard Wyckoff Market Cycle Phases?

Richard Wyckoff's Market Cycle
Market Cycle

The adjacent chart shows different phases of a market cycle. These phases show which party Buyer or Seller or neither is in control of the markets. It also helps us discern what the Smart Money (SM) is doing in these consolidation phases.

The chart shows following phases,

  • Accumulation Phase – SM finds prices low enough and accumulates their long positions in this range. Markets usually moves sideways for extended period of time and most patient of investors wear out. That is when SM buys from them for the inevitable rise that follows.
  • Mark Up – Here the price of the instrument that SM accumulated in the prior phase starts to move up. This is the phase when SM sits tight and let the market work for them.
  • Distribution – SM finds that the markets have reached an over priced state and starts distributing their holdings from accumulation phase. This caps the upside. Late momentum buyers are still buying and SM is happy unloading to them.
  • Mark Down – Here once the SM unloads everything to late buyers the price starts falling as SM are not supporting the price. The Sm now waits patiently for the prices to reach an under priced level so that they can stat a fresh phase of accumulation.
  • Re-Accumulation – Markets sometimes pause in a mark up phase when eager buyers take premature profits. Traders convinced of the up trend now buy any break that comes, this is the re-accumulation phase. Early in a trend this behavior makes sense, the same behavior late in the trend is suicidal.
  • Re-Distribution – Markets sometimes pause in a mark down phase when eager sellers take premature profits. Traders convinced of the down trend now sell any rally that comes, this is the re-distribution phase. Early in a trend this behavior makes sense, the same behavior late in the trend is suicidal.

Learn how to apply different Strategies to Wyckoff Market Cycle Phases?

 

Market Cycle Phases
Wyckoff Market Cycle Phases and Strategies

We have seen 3 strategies which can be employed to different market conditions. They were Buy Low Sell High, Buy Breaks and Sell Rallies and Buy Break Outs and Sell Break Downs.

The key is to know when to use which strategy. The adjacent chart shows just that.

  • Accumulation Phase – When we are in an accumulation phase the markets are moving sideways and always reverting back to a mean. We can easily find out when using a Chart. During this phase we use Buy Low Sell High Strategy with a view that prices will revert back to mean. Read more here…..
  • Mark Up Phase – Here the trend begins once we Break Out from the consolidation of accumulation phase. So the strategy we employ is Buy Break Outs. The key is to find out when the markets are poised for a break out. Read more here…..
  • Re-Accumulation Phase – Here the trend is in early stage and any break is to be bought into. We use the Buy Breaks Strategy to trade the trend. Read more here….
  • Distribution Phase – When we are in an distribution phase the markets are moving sideways and always reverting back to a mean. We can easily find out when using a Market Profile Chart. During this phase we use Buy Low Sell High Strategy with a view that prices will revert back to mean. Read more here…..
  • Mark Down Phase – Here the trend begins once we Break Down from the consolidation of distribution phase. So the strategy we employ is Sell Break Downs. The key is to find out when the markets are poised for a break down. Read more here…..
  • Re-Distribution Phase – Here the trend is in early stage and any rally is to be sold into. We use the Sell Rallies Strategy to trade the trend. Read more here….

Understanding of these Wyckoff Market Cycle Phases helps us employ correct strategy based on current market conditions. Invaluable when competing for opportunities against the Smart Money.


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