To achieve success in the Forex market, you need to be able to receive and analyze information related to trading volumes. VSA (Volume Spread Analysis) is designed specially for this purpose. Such analytics enable traders to see the manipulations of major players and the moments when the market trend changes.
What is VSA analysis
In the context of trading using VSA analysis, it means the examination of the relationship between the following indicators:
- candlestick (bar) volumes;
- spread, which is the difference between the buy and sell prices of a currency pair;
- change in the value of an asset in one session.
Volume is an indicator that reflects the activity of players at a certain price level or in a specific period of time. This information is analyzed to determine the level of supply and demand, which is a consequence of the positions opened by large players (banks, investment funds, professional managers, etc.).
As a result, you can grasp the market situation to determine the direction of the price:
- when demand prevails over supply, the market goes up;
- in the opposite situation, a downward movement begins.
By performing a VSA analysis, you can determine the disposition of the major players, who are able to set the asset movement direction. The obtained results allow you to find the best market entry points. At the same time, it should be understood, that VSA analysis is not a full-fledged trading strategy itself. It is only a general method of volumetric market analysis. It helps to identify the moment when major players enter the market in order to follow them.
The benefit of VSA analysis for an ordinary trader is that it allows to see the main movement of an asset and helps to remain in the market during a correction or false rollback.
Application of VSA analysis
The foreign exchange market has a decentralized structure. For this reason, you cannot see the separately displayed indicators of the volume of transactions in the terminal.
But you can use tick volume. It shows how many positions were opened in a certain period of time at your broker. In this case, the amount of data is less compared to the stock market, but this information is enough for effective VSA analysis.
The main thing is to take into account the historical dynamics of price changes (background), which determines the general trend in the market at the current time. Tick volumes allow you to do this. To understand the historical background, the interval from 15 to 20 previous bars on the selected timeframe is usually used. Daily or weekly charts are preferable.
When it comes to market activity, there are 3 main periods of price movement on a candlestick chart:
- Accumulation. Occurs when the previous trend ends. The crowd begins to understand that the price movement may change and actively closes their positions. At this time, major players are buying up assets, but so far they do not allow the trend to change. As a result, the price moves to the stage of consolidation, i.e. sideways movement.
- Trend. It begins after the critical mass of accumulation is reached. As the price moves, positions with a large volume are added.
- Distribution. It resembles the accumulation stage, but differs in that it is formed after a reverse trend.
Accumulation and distribution are always price movements in a narrow corridor. Positions should be opened when multiple candlesticks with a large volume are formed in one direction. Such a channel breakout signal must be confirmed with the help of technical analysis.
VSA analysis signals
When working with the market in the VSA format, several basic signals are used.
This pattern is also called absorbing. Its main purpose is to indicate a high probability of a trend change or its completion.
With a sharp increase in interest in the asset, a rapid increase in liquidity occurs. As a result, the effect of market stop and uncertainty is formed. In such a conditions, it seems that the main movement ends, and now the price will go in the other direction. But this is not necessarily the case.
Small traders, seeing a strong movement in a new direction, decide to open positions on this impulse. But major players were not going to change the trend, they just stopped it for a short time. Such long confusing candlesticks with high volume are often used by market makers to collect stops. As a result, the price returns to its original movement, and traders who open orders in the direction of the momentum lose money.
The point is that you need to wait for the trend change to be confirmed in the form of other candlesticks with a large volume. If they do not appear, it is better to wait.
Up-thrust reversal pattern
This pattern is also called a pin bar, and it allows you to determine the moment when a trend reversal begins.
Up-thrust consists of three candlesticks, the central one of which must cast a long shadow down (in case of a bullish signal) or up (in case of a bearish signal).
The appearance of an up-thrust is considered a reliable signal of a reversal only when the volume indicator shows growth. Otherwise, the signal is considered false.
Testing the supply-and-demand balance
This pattern is suitable for any currency pair, volatility and timeframe. The purpose of testing is to determine the balance of powers in the market in the medium term period.
On the screenshot, you can see how the trend faces the support and resistance levels. Pending orders often accumulate there. While the market is in the accumulation phase, a price movement corridor is formed (from level to level).
Positions with large volumes are required to exit the corridor. In this case, such deals were sell orders from major players. The level is broken through and the bears form a downtrend. The price goes outside the corridor. Again, it were the volumes that confirmed the emergence of a strong movement.
This pattern should only be used when there are strong levels. This algorithm of actions rarely works on correction. That's why it is important to ensure that there is no corrective price movement on the chart.
This pattern is similar to the previous one, and it contains several volatile bars or candlesticks with high volume. They break up previously formed price patterns.
If such candlesticks appear during sideways movement, then the end of the consolidation period should be expected.
The following indicators can be seen on the screenshot:
1, 2 – sellers have twice kept the price from further growth.
3 – the chart did not reach the resistance level at all.
4 – an important component is the breaking through the level by a candlestick with a large volume (or several candlesticks).
The main difference of this pattern is that after consolidation and exit from the corridor, the price moves in the opposite direction from the previous trend.
This pattern forms when big players try to force small traders out of a prospective bullish move. They "shake up" the rate with powerful impulses against the trend.
As a result, a strong drawdown is formed, which players with small deposits cannot withstand. They either have their stops closed, or they don't have enough money to hold the position, in the case of using leverage. However the most common option is that beginners simply close their positions at a loss. This is because they lose faith in further growth on a psychological level.
After the shake-up is over, large traders support the bullish movement again. The volume indicator can help to detect such a situation and exit the market in time. When the "shaking" ends, the position must be reopened.
Tips for using VSA analysis
When working with tick volumes on Forex, it is recommended to compare data from several brokers. Real accounts are desirable. If there is a great difference between the indicators from different brokers, it is not recommended to open a position.
Tick volume reflects the number of orders hidden in one candlestick. But it does not show how much money is invested in positions. For this reason, this indicator can be safely used only as a signal for the continuation of a strong movement. When a consolidation is formed, the tick volume must be supplemented with technical and fundamental analysis.
When trading on the Forex market, the VSA analysis method will be effective only as one of the components of a full-fledged trading strategy.
And if you want to make your trading more efficient, we advise you to use indicators and advisors that help you better analyze the market and open profitable positions. In this regard, we invite you to visit our section, where you can find various auxiliary tools for VSA analysis and other trading strategies.