Predicting the Next Candle Using Volume Spread Analysis (VSA)

Unlock the power of Volume Spread Analysis (VSA), a leading strategy used in Smart Money Trading to anticipate price movements. Learn how combining Price Action Analysis with volume reveals the activity of professional traders and helps detect potential Market Manipulation Strategies by understanding supply and demand imbalances.

What is Volume Spread Analysis (VSA)?

VSA studies the relationship between price (specifically the spread of candles) and its corresponding volume. It aims to identify the underlying cause of market movements by tracking the activity of "Smart Money" – large institutions with the power to move markets. While price can be manipulated, volume (or tick volume in Forex) provides a clearer picture of market participation.

VSA helps eliminate subjectivity by focusing on the interplay between price action and volume, applicable across markets (Forex, stocks, commodities) and timeframes. It's based on Wyckoff principles and focuses on identifying imbalances between supply and demand.

Key Components of VSA

• Spread: The range of a price bar (High-Low) or the candle body (Open-Close).
• Volume: The frequency of transactions during a specific period. High volume indicates high activity.
• Volume Types: Bearish (Red) vs. Bullish (Green) volume bars.
• Above Average High Volume: Volume significantly higher than the recent average (e.g., compared to a 20-period MA on volume).
• Ultra-High Volume: The highest volume in the current session, often exceeding previous peaks.

Understanding these components is crucial for interpreting VSA signals within the context of market phases (Accumulation, Mark Up, Distribution, Mark Down – based on Wyckoff theory).

Identifying Signs of Strength (SOS) - Bullish Signals

SOS indicates that selling pressure (Supply) is exhausted after a downtrend, and buying pressure (Demand) is increasing, potentially leading to a price rise. Key SOS patterns include:

• Down Thrust: Bullish pin bar or Doji on ultra-high/above-average volume. Low spread + high volume suggests demand overcoming supply.
• Selling Climax: High spread bearish candle closing off its lows (noticeable lower wick) on ultra-high/above-average volume. Suggests heavy selling absorbed by strong buyers.
• Bearish Effort < Bearish Result: Large bearish candle (result) on lower volume than the previous candle (effort). Suggests lack of conviction behind the down move.
• Bearish Effort > Bearish Result: Small bearish candle (result) on higher volume than the previous candle (effort). Suggests selling effort is being absorbed by buyers.
• No Supply Bar (Continuation): Low spread bearish candle with a lower wick on volume lower than the previous two bars. Indicates lack of selling interest, often seen after strength or in an uptrend.
• Pseudo Down Thrust (Continuation): Bullish pin bar/Doji with low spread and volume lower than the previous two bars. Signals lack of supply.
• Inverse Variations: Patterns like Inverse Down Thrust also signal strength through specific price/volume discrepancies.

Identifying Signs of Weakness (SOW) - Bearish Signals

SOW indicates that buying pressure (Demand) is exhausted after an uptrend, and selling pressure (Supply) is increasing, potentially leading to a price fall. Key SOW patterns include:

• Up Thrust: Bearish pin bar or Doji on ultra-high/above-average volume. Low spread + high volume suggests supply overcoming demand.
• Buying Climax: High spread bullish candle closing off its highs (noticeable upper wick) on ultra-high/above-average volume. Suggests heavy buying absorbed by strong sellers.
• Bullish Effort < Bullish Result: Large bullish candle (result) on lower volume than the previous candle (effort). Suggests lack of conviction behind the up move.
• Bullish Effort > Bullish Result: Small bullish candle (result) on higher volume than the previous candle (effort). Suggests buying effort is being absorbed by sellers.
• No Demand Bar (Continuation): Low spread bullish candle with an upper wick on volume lower than the previous two bars. Indicates lack of buying interest, often seen after weakness or in a downtrend.
• Pseudo Up Thrust (Continuation): Bearish pin bar/Doji with low spread and volume lower than the previous two bars. Signals lack of demand.
• Inverse Variations: Patterns like Inverse Up Thrust also signal weakness through specific price/volume discrepancies.

Conclusion: Applying VSA in Your Trading

Volume Spread Analysis is a powerful technique within the Smart Money Trading framework. By meticulously analyzing the relationship between price spread and volume, traders can gain insights into the balance of supply and demand, detect the footprints of institutional activity, and potentially anticipate the market's next move. Combining VSA with solid Price Action Analysis can significantly enhance trading decisions and help identify subtle Market Manipulation Strategies.