What is Volume Spread Analysis (VSA)?

What is Volume Spread Analysis (VSA)?

What is VSA?

Volume Spread Analysis also known as VSA is a tool to study the relationship of price and volume looking to predict the short-term direction of the market.

This tries to analyze:

  • The volume
  • Range / Dispersion or difference between the maximum and the closing (do not confuse with the bid / ask spread).
  • Range closing price (is the closing price close to the top or bottom of the bar?)

This analysis tries to look for or study the causes of price movements in the market. Those movements are based mainly in the imbalance between demand and supply that is created by professional operators. The VSA then studies the interrelationship between these three variables and the possible short-term movement of the market.

Who invented VSA?

There are basically three people:

Jesse Livermore

Livermore was a great trader who made several great fortunes in trading and also lost them product of errors. He left several basic rules of trading and his theory was mainly about the manipulation of the market. He was not a great educator but rather a trader. However, he never left concrete trading methods.

Richard Wyckoff

Wyckoff was an authoritarian figure in the stock markets. He was also editor of the Stock Market Technique magazine. But more than trader was an educator. However he made a great fortune as a trader. He proposed the idea of ​​the “composite trader” to explain the phases of the market, accumulation, distribution, markup and markdown.

A qualified trader is able to clearly identify in which of these four phases the market is located:

  • Accumulation (professionals buying at wholesale prices)
  • Mark-up (bullish movement)
  • Distribution (Professionals who sell at retail prices)
  • Mark-down (bearish movement)

He further explained the market through three laws or principles:

  • Price and volume
  • Cause and effect
  • Effort and result

Tom Williams

Tom Williams worked in a union (Smart Money) and later based on the ideas of Wyckoff and Livermore, created what is now known as Volume Spread Analysis or VSA. The Williams technique completely ignores the opening of a bar and uses the maximum (high), the minimum (low) and the closing.

In which markets does VSA works?

Volume Spread Analysis focuses on price, volume and also seeks to find the manipulations of professional traders (or Smart Money). As long as the market has a group of professionals and the data is accurate, the conditions for using VSA in that market are maintained. That way almost all the markets, Stocks, Futures, Forex, etc. adapt to these conditions. However in Spot Forex markets the volume is somewhat complicated as tick volume is used and this technique may not be applicable.

This type of analysis continues to be valid. Falls on the classical volume analysis type and complements other types of analysis of higher resolution such as Order Flow.

If you want to learn more about VSA, Order Flow and many other trading styles you can join our forum and interact with many other traders across the world. You will find there also tools you can download to perform this kind of analysis.

$$ f(x) = \int_{-\infty}^\infty\hat f(\xi)\,e^{2 \pi i \xi x}\,d\xi $$