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Volume Spread Analysis the Key to trading in harmony with the smart money

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Most traders are aware of the two widely known approaches used to analyse a market: fundamental analysis and technical analysis. Many different methods can be used in each approach, but generally speaking fundamental analysis is concerned with the question of why something in the market will happen, and technical analysis attempts to answer the question of when something will happen. Volume Spread Analysis, however, is a third approach to analysing a market. It combines the best of both fundamental and technical analysis into a singular approach that answers both questions of 'why' and 'when' simultaneously.

Introduction to Volume Spread Analysis

Volume Spread Analysis (VSA) methodology takes a multi-dimensional approach to analysing the market, and 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 and also the creator of TradeGuider Systems. The VSA method works particularly well at highlighting the imbalances of Supply and Demand.

VSA builds on the pioneering work of Richard D. Wyckoff, a famous 1920's trader. He based his trading decisions on supply and demand in the markets and how they are inextricably linked to professional activity - 'Smart Money' trading (Wyckoff's principles are still taught at the Golden Gate University in San Francisco). In any business where there is money involved and profits to make, there are professionals. 

Doctors are collectively known as professionals, but they specialize in certain areas of medicine. The financial markets are no different. The financial markets have professionals that specialize in certain instruments as well: stocks, grains, FOREX, etc. The activity of these professional operators, and more important, their true intentions, are clearly shown on a price chart if the trader knows how to read them. Volume is the major indicator for the professional trader. Volume Spread Analysis seeks to establish the “cause” of price movements, and from the cause, 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 as well as the probable near term direction of the market. 

These variables are the amount of volume on a price bar, the price spread or range of that bar (do not confuse this with the bid/ask spread), and the closing price on the spread of that bar. For the correct analysis of volume, one needs to realize that the recorded volume information contains only half of the meaning required to arrive at a correct analysis. The other half of the meaning is found in the price range. Volume always indicates the amount of activity going on and the corresponding price spread shows the price movement on that volume.

The effect is either a bullish or bearish move according to the prevailing market conditions. The ‘Smart Money’ operating in the markets are 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 analyzing a market! 

The significance and importance of volume appears 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 similar to buying an automobile without a gasoline tank. Where volume is dealt with in other forms of technical analysis, it is often viewed in isolation, or averaged in some way across an extended timeframe. Analyzing volume, or price for that matter, is something that cannot be broken down into simple mathematical formulae. This is one of the reasons why there are so many technical indicators; some formulas work best for cyclic markets, some formulas are better for volatile situations, whilst others are better when prices are trending.

Some technical indicators attempt to combine volume and price movements together. This is a better way, but rest assured that this approach has its limitations too, because at times the market will go up on high volume, but can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume. So, there are obviously other factors at work. 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.

Examples of Market

Manipulation So why do so many traders lose? They lose because they have not grasped some fundamental facts which drive all markets.

Fact number 1; By far the largest players in the market are the hedge funds, investment banks, trading syndicates, such as Goldman Sachs, George Soros and Berkshire Hathaway headed up by Warren Buffet. These are organisations you have hears of. There are many, many others who are not publicly known, but together, they are by far the biggest players in the international trading community. At Tradeguider we call them the “Smart Money”

Fact number 2: The “Smart Money” have to make money and they do this by selling at the top of the market and buying at the bottom.

Fact number 3: In order to do this, they have to move the market so that the price rises to the top or falls to the bottom.

Markets have always been manipulated here are just a few examples: Let’s begin with the British Petroleum oil spill disaster in 2010. On the 25th June that year the shares fell to just under 27 dollars. the news was grim the pundits and reporters were talking in terms of huge losses and a possible break-up of the company and everyone who had shares was looking to sell in full expectation that prices were plummeting.

And sell they did - straight into the hands the smart money professionals who bought cheap. Within six months the price of the stock doubled - buy cheap, sell back when the market rises. That’s how the game is played. On May 6 2010 something very strange happened in the financial markets. This day is now referred to as the flash crash because no credible explanation has been provided by the regulatory authorities as to exactly what caused the crash or who was responsible. In fact, many investors begin to suspect the all was not what it seemed to be.

CNBC's closing bell anchor-woman Maria Bartiromo was reporting on the day the flash crash happened. Fellow reporter Matt Nesto was explaining some unusual anomalies in a number of stocks - even though the mainstream media claims that is was caused by a lone trader hitting the wrong button - B for billion instead of m for million - Maria saw through it straightaway. She called it an outrageous example of Market Manipulation. What we actually witnessed on May 6 was a giant shakeout of the market. The smart money was expecting higher prices and wanted to catch the retail traders, by marking the price down heavily, before moving the price up.

They were bullish the stocks were going to rise and they want to buy at the best possible price - wouldn't you want to do the same? Buy at the lowest price name knowing you could sell it later for much more than you bought it for In February this year we saw the headline “Quantus soars to record half year profits”. is the headline on February 25rd 2016 "Lower oil prices have helped Qantas post a record pre-tax profit " and "best first-half profit in the Australian airline's 95-year history" are used directly below the headline.

All the news is now bullish the stock has been going up and up because it is in an uptrend. To the retail trading and investing community the appeared to be a great opportunity to buy the stock because everything lined up and if you didn't go into the market by now you'd miss the move, okay so buy, buy, buy! What happened? the stock plummeted spectacularly and the uninformed retail traders said “bye-bye” to their capital.

That's the trading game - buy low sell high. Be a predator, a clever predator that understands exactly how the prey think and act Smart Traders appreciate this and understand that quite often, all is not what it seems. The media, the sentiment and the emotions will often lead to poor trading decisions and big returns for the professionals. The good thing is that whilst the Smart Money try and disguise their activity there is one place where they cannot hide.

The History of VSA

As mentioned earlier, this is not a new concept. Tom Williams, the inventor of VSA, is a former syndicate trader. He observed that the markets were being manipulated and that the key to unlocking the truth lay in the relationship among the Volume, the Spread of the bar, and its Closing Price. Tom spent many years studying the concepts of Richard Wyckoff, a renowned trader during the 1920’s and 1930’s.

Richard wrote several books about trading the Markets, and he eventually created the Stock Market Institute in Phoenix, Arizona. At its core, Wyckoff’s work is based on the analysis of trading ranges and determining when the stocks are in basing, markdown, distribution, or mark-up phases. Incorporated into these phases are ongoing shifts between ‘weak hands’, or public ownership, and ‘the composite operator’, now commonly known as ‘Smart Money’.

When Tom Williams went back to Beverly Hills in the early 1980’s, he began to investigate the possibility of computerizing the system he had learned as a syndicate trader- and so began the evolution of Volume Spread Analysis (VSA). With the assistance of an experienced computer programmer, Tom carefully studied thousands of charts to recognize the obvious patterns that were left when professional operators, or Smart Money, were active. This technique, although simple in concept, took several years to write and is now taught as a methodology in combination with software known as TradeGuider.

The Key Players

There are a few specific individuals involved in the evolution of what VSA is today, as well as a handful of experts that teach the Volume Spread Analysis method and its principles. Richard D. Wyckoff worked in New York City during a “golden age” for technical analysis that existed during the early decades of the 20th Century. Wyckoff became wealthy through trading in the stock market, but he also became altruistic about the public's Wall Street experience. He turned his attention and passion to education, teaching, and in publishing exposés such as “Bucket Shops and How to Avoid Them”, which were run in New York’s “The Saturday Evening Post” during the 1920’s.

As a trader and educator in the stock, commodity and bond markets throughout the early 1900s, Wyckoff was curious about the logic behind market action. Through conversations, interviews and research of the successful traders of his time, Wyckoff augmented and documented the methodology he traded and taught. Wyckoff worked with and studied them all, himself, Jesse Livermore, E.H. Harriman, James R. Keene, Otto Kahn, J.P. Morgan and many other large operators of the day.

Wyckoff's research claimed many common characteristics among the greatest winning stocks and market campaigners of the time. He analyzed these market operators and their operations, and determined where risk and reward were optimal for trading. He emphasized the placement of stop-losses at all times, the importance of controlling the risk of any particular trade, and he demonstrated techniques used to campaign within the large trend (bullish and bearish).

The Wyckoff technique may provide some insight as to how and why professional interests buy and sell securities, while evolving and scaling their market campaigns with concepts such as the "Composite Operator". Wyckoff felt that an experienced judge of the market should regard the whole story that appears on the tape as though it were the expression of a single mind. He felt that it was an important psychological and tactical advantage to stay in harmony with this omnipotent player. By striving to follow his footsteps, Wyckoff felt we are better prepared to grow our portfolios and net-worth.

Wyckoff was a keen observer and reporter who codified the best practices of the celebrated stock and commodity operators of that era. The results of Richard Wyckoff’s effort became known as the Wyckoff Method of Technical Analysis and Stock Speculation. Wyckoff is a practical, straight-forward bar chart and point-and-figure chart pattern recognition method that, since the founding of the Wyckoff and Associates educational enterprise in the early 1930’s, has stood the test of time.

Around 1990, after ten years of trial-and-error with a variety of technical analysis systems and approaches, the Wyckoff Method became the mainstay of The Graduate Certificate in Technical Market Analysis at Golden Gate University in San Francisco, California, U.S.A. During the past decade dozens of Golden Gate graduates have gone to successfully apply the Wyckoff Method to futures, equities, fixed income and foreign exchange markets using a range of time frames.

The following are the three fundamental laws of the Wyckoff Method will be defined and applied :

1. The Law of Supply and Demand – states that when demand is greater than supply, prices will rise, and when supply is greater than demand, prices will fall. Here the analyst studies the relationship between supply vs. demand using price and volume over time as found on a bar chart.

2. The Law of Effort vs. Results – divergences and disharmonies between volume and price often presage a change in the direction of the price trend. The Wyckoff ―Optimism vs. Pessimism‖ index is an on-balanced-volume type indicator helpful for identifying accumulation vs. distribution and gauging effort.

3. The Law of Cause and Effect – postulates that in order to have an effect on you must first have a cause, and that effect will be in proportion to the cause. This law’s operation can be seen working as the force of accumulation or distribution within a trading range works itself out in the subsequent move out of that trading range. Point and figure chart counts can be used to measure this cause and project the extent of its effect.

Tom Williams is the founder of TradeGuider Systems Software (formerly Genie software) and initiator of the Volume Spread Analysis methodology- he was also a very successful syndicate trader in the U.S. Tom was introduced to day trading while working in Beverly Hills for a boss of an elite group of trading syndicates. These trading syndicates revealed their successful strategy to Tom.

He gained their trust and confidence and soon became an established member of their organization. Tom began hand-drawing the charts that the pool would use to make their speculative attacks, and while doing this, he recognized a relationship between price movement, the volume, and where the price closed. The syndicates decided it was time to send Tom to the Wyckoff Chart Reading course in order for him to understand and finally get a firm grasp of exactly what was going on in the markets, especially when he drew these charts.

Tom realized all the clues to make wining trades were in the charts, if you knew how to read them correctly. Williams retired from professional trading at the age of 40, taking up a number of commercial ventures during this period. Tom continued to trade as well, but became consumed with all the knowledge he had learned from the syndicate and it’s traders back in the United States.

Tom's real ambition was to help traders operate in a more informed way, and this idea formed the basis of his software development company, Genie Software Ltd. He wanted to computerize the Wyckoff Method and the knowledge he had gained from that course to produce automated trading signals that did not have to rely on human intervention. Tom further developed Wyckoff's methodologies to create his own more potent methodology - Volume Spread Analysis - regularly referred to as "Wyckoff on Steroids"!

Tom has spent many years refining the signals in this flagship product, VSA (The forerunner to TradeGuider) to make TradeGuider Software Systems what it is today. He also wrote two books that he self-published, “The Undeclared Secrets that Drive the Stock Market” and “Master the Markets”. Both books have now sold or been distributed to over 100,000 traders and investors worldwide. Tom Williams has been energetically and successfully applying his unique methodologies for the last 30 years to the Stocks, FOREX and Futures markets.

Using Volume Spread Analysis in Your Trading

Volume Spread Analysis was previously known as Wyckoff Volume Spread Analysis and has been in existence for over 20 years. Driven by an artificial intelligence engine,TradeGuider VSA is unique and is capable of analyzing any liquid market in any time frame by extracting the information it needs in order to indicate imbalances of Supply and Demand evident in a chart. In doing so, TradeGuider is able to graphically exhibit the essential dynamics of market movement.

Volume Spread Analysis (VSA) is at the core to the Tradeguider trading solution – the VSA SMART Center Pro. The VSA SMART Center Pro is a complete revolutionary trading system which has become a game-changer for the international trading community. From time to time in the history of international trading key milestones are reached. From the realization in the 1900’s by Richard Wyckoff that markets were moved by the Composite Operator to Richard Ney's ground-breaking work in in the 1950's. In the 1980's Tom Williams built on the original Wyckoff methodology to introduce Volume Spread Analysis. And now the VSA SMART Center Pro marks a huge milestone by making the process of trading and investing substantially easier and quicker. Than ever before.

The VSA SMART Center Pro Package consists of 2 key elements:
1. An innovative new educational program based around a simple 3 part trading strategy .
2. A revolutionary new piece of trading technology - The VSA smart CENTER PRO - that will make the whole trading process much easier and intuitive.

Do you find the business of analyzing charts laborious and time consuming? When you do find trades do you find it difficult to identify successful entry points? When you get into a trade do you have problems finding the optimum exit? And have you ever entered a trade convince the time was right only to find the market immediately changes direction? Would you rather spend more time taking and managing trades, then searching for them? If any of these strike a chord with you then welcome to VSA SMART Center Pro VSA SMART Center Pro uses Volume Spread Analysis - a unique and powerful methodology. It is neither Technical Analysis or Fundamental Analysis.

On their own technical and Fundamental Analysis do not take into account 3 absolutely crucial factors:

1. The markets are moved by supply and demand – no technical analysis tools can predict this

2. You cannot use past price to determine future price in the markets. Because the markets are moved dynamically – that’s why the market turns just when you didn’t think it was going to.

3. The supply and demand are created dynamically by the ―Smart Money‖ players who continually move the markets. Neither Fundamental or Technical Analysis can identify this activity. These 3 factors cause the huge majority of retail traders and investors to lose money in the markets.

The good news is that Volume Spread Analysis methodology focuses on the imbalance of Supply and Demand. It does not use past price to predict future price. Instead it tracks the activity of the Smart Money enabling you to trade in harmony with the professional winners.It’s the methodology the Smart Money don’t want you to know about and it is over 100 year old and still taught as part of the finance degree at the Golden Gate University in Sen Francisco.

VSA SMART Center Pro is a trading system which is built around the Tradeguider 3 part trading strategy Scan Confirm Trade. The trading system plugs directly into many of the leading trading platforms to bring the SMART tools onto the charts in the 3rd party platform. The first stage of the Scan Confirm Trade process is scan. SMART Center pro dynamically scans up to 24 instruments in real time. Each instrument has its own scanner.

The information in this scanner is them summarized in the SMART Console window which can monitor up to 23 more instruments When the trend is aligned in the individual scanner the trend is confirmed for that time-frame in the monitor.

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SMART Center Pro is analyzing trend alignment, across the time frames, using our proprietary trend analysis tools. When they identify trend alignment, the system automatically issues an audio alert. The audio alert is complimented by the instrument flashing in the Monitor window. When an alert has been received you have completed the first of our 3 stage process = The SCAN stage A potential trading candidate has now been identified.

Clicking anywhere In scan summary area initiates stage 2 – CONFIRM The SMART Center then scans across the time frames for a confirmation signal. Confirmation signals are VSA principles which confirm a change in direction. When a VSA confirmation signal arrives, again you will be notified Again the box will flash in a different color. Now you have completed stage 2 - CONFIRM To enter the 3rd stage of our trading process – TRADE – you open the chart the signal has appeared on and use you skills as a trader to decide to take the trade.

Once you are in the trade the trending tools and the stop management tools keep you in the trade for as long as your risk management criteria allow. And that’s it – a simple clear process which works across all time frames, any market and every trading style. Most of the tools are configurable through the settings panel which enables you to set up the tools, configure them, change color schemes and set up your watch list of trading instruments.

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