Something new is always something unknown, and therefore terrible. One of these "unknowns" is the Forex market. It is very difficult for beginners to adapt to what is happening on the market. It seems that prices are moving erratically, not relying on any regularity, so it is impossible to predict the situation. But the devil is not so terrible as he is painted - the Wyckoff VSA method copes well with this task.
General information
Already at the beginning of the twentieth century, Richard Wyckoff began to take an active interest in financial markets. His unique approach to solving trade problems is called the Wyckoff theory. This technique taught traders to choose profitable market positions and manage risks even within the framework of technical features.
Wyckoff has achieved unprecedented results in trading. He published a book devoted to this method, which is considered the first full-fledged exchange trading textbook. It is worth noting that Richard Wyckoff developed his theory before the start of the Great Depression, but even today his technique works flawlessly. He was the first to combine all existing trading techniques into one system and created on its basis a complete step-by-step guide.
Founder of VSA
Richard Wyckoff is considered the founder of the VSA method. In short, his theory allows the trader to determine the most profitable moments of entry and exit from the market. Understand how participants change trades and form a price movement. The VSA trading method focuses on greed and fear. The author suggests that psychological factors play an important role in shaping the market. After all, no matter how you look, each bidder is afraid to lose his investment, but at the same time he wants to get more profit. What used to be, what is now the basic human aspirations remain unchanged. Therefore, the Wyckoff method even today works like a clock. Only those who can soberly assess the current situation in the market can make a good profit. A good helper in this matter will be the VSA method.
Terminology
The acronym VSA stands for Volume Spread Analysis. Translated literally - "analysis of spread and volume." It is these variables that the proponents of the VSA method use:
- Volume. It implies the total number of purchased and sold contracts within a single candle.
- Spread Indicates the difference between the upper and lower (High and Low) indicators of the candle.
In simple terms, traders using the VSA method compare trading activity with the range of the candle. Based on the results, they draw conclusions about the motives of individual players and the market crowd as a whole.
The essence of Volume Spread Analysis
The VSA Trading Method analyzes the four main trading characteristics of the Forex market:
- Spread
- Close position.
- Volumes that are below the chart, in total with the spread and closing of the candle.
- History of changes in spread and volumes.
Simply put, the main purpose of the analysis is to determine the causes that influence the price change. Professional market operators create an imbalance between supply and demand in the market. The activities of operators are displayed on the price chart, the main thing is to read it correctly, then you can buy stocks, futures or currency under more favorable conditions.
The VSA method uses three variables for analysis:
- Bare . The total trading volume of a single candle.
- Spread Range of candles.
- Price. This refers to the closing price of the candle.
These variables help the player to clearly see the main phases of the market, benefiting for themselves.
Unlike other exchange markets, there are no real numbers of traded volume on the Forex, as this exchange does not have a centralized place. Nevertheless, trading volumes can be analyzed. If they grow, then it is safe to say that a major player has entered the market. When the transactions are small, the bulk of the manipulation occurs between traders with a small capital. The VSA method is universal, because it works the same in all time ranges.
Basic principles
Unlike other indicator systems, where the rules for buying and selling are clearly spelled out, Volume Spread Analysis is focused on understanding the processes that occur. In his book, Wyckoff noted that the market will not behave the same. Any transaction that seems familiar to the trader, because he has already encountered it, may have a completely different outcome.
If you simplify the VSA method a little more, it will sound like this: you need to buy the instrument during the accumulation period, and sell the asset in the distribution process. And even simpler: you need to buy while cheap, but the price has a tendency to increase, and you need to sell when it's still expensive, but the price has already begun to decline.
Trading Signals
To correctly calculate the time when it is best to buy and sell instruments, you must be able to notice VSA trading signals. The Wyckoff method implies by such signals the weakness and strength of the market, which indicates the completion of the market phase. A trader does not need special programs, but only an understanding of how large bidders behave and in what direction they are moving. The beginner must learn how to handle volume values and a price chart.
Principal positions
Trading signals are aimed at studying three main positions:
- Determine supply and demand, based on the sizes that are generated by the main market operators. If there is a large demand, then the value of the instrument will be understated, assets will develop. If the offer is high, accordingly, the site will go down.
- To study the "cause-effect". The effect is market dynamics, and the reason is trading. Accordingly, any dynamics provoke trades that are formed by key players. When the bidding is insignificant, there will be no positive dynamics.
- To analyze the "force-result". Effort is a large volume of demand and (or) supply. If a large amount of effort is noted in the market, then it will develop.
Level testing
An indispensable skill for a trader is the ability to test levels. The VSA method basically operates with the concepts of supply and demand, because it is they that influence the pricing policy. Demand is a price zone in which the number of people wishing to purchase an instrument is much larger than this price level can accommodate. Supply is a price zone where there are more offered instruments than potential buyers. To understand the basics of level testing, you should pay attention to the graph:
As you can see, in area A, supply and demand are in equilibrium, so those who want to buy or sell assets can do this. The price range here is quite stable. But if you pay attention to region B, you can see that demand has increased. Accordingly, some traders who wanted to acquire a certain instrument remained out of the market. Therefore, area A is designated as a demand zone (or support area). Further pricing will be based on indicators of this particular area. Thus, you can retest demand levels and enter the market with minimal risk of losses.
Bar analysis
During its existence, the Wyckoff method has undergone various interpretations. Based on his teachings, a bar analysis was built. Wyckoff’s method and VSA-analytics, focused on trading activity, allow you to determine when professionals enter the market, that is, the time when demand appears on the market.
For example, it is better to use a diagram that displays a graph of a pair of dollars and francs.
An active rise is noted in the market until a bar appears on the chart (figure 1). At this bar, volume is actively growing, which indicates the entry of professional traders into the market. Those who have been on the exchange for a long time managed to notice that if the bar is closed in the middle of trading, while there is a high level of demand, those players who make bets on the increase will soon be at a loss. So, the bar under the number two shows that the auction is still ongoing, and bar number 3 indicates a decrease in prices at the maximum volume of sales.
Literature
A lot has been said and written about VSA. But even if you reread hundreds of articles, they will not be able to compare with the information presented in books. The VSA method was once studied by D. Hudson and Tom Williams. They wrote books about trading on the exchange, based on the Wyckoff method. It is in this literature that all the secrets of exchange trading, which still have not lost their relevance, are described in detail.
Tom Williams was the first to introduce the Wyckoff method to the world. “Owners of the markets” and “Indescribable secrets that move the stock market” - these books are better for a novice trader to learn from cover to cover, they can make a multimillionaire out of an unsure of himself. Now the VSA method is being promoted to the masses by Gavin Holmes, a student of Tom Williams. He was a simple policeman until he met a famous trader. Not so long ago his book "Trade in the Shadow of Smart Money" was published. This edition is especially recommended for beginners. Gavin Holmes, like no one else, understands how it is to come to the stock exchange even without a minimum supply of knowledge and a hint of specialized education. It is also a good idea to read D. Hudson's book, The Wyckoff Method, to get a more complete picture of the technique.
For almost 100 years, the Wyckoff method has been successfully proving its efficiency. Testimonials suggest that VSA works. And it doesn’t matter if a person deals with real or virtual trading volumes, if he learns to use this information correctly, he will get an excellent tool for analyzing the market, which will work always and everywhere.