Something new is always something unknown, that's why it's scary. One of these “unknowns” is the Forex market. It is very difficult for beginners to adapt to what is happening in the market. It seems that prices move chaotically, without relying on any regularity, so it is impossible to predict the situation. But the devil is not as scary as he is portrayed - the Wyckoff VSA method does a good job of this task.
General information
Already at the beginning of the 20th century, Richard Wyckoff began to take an active interest in financial markets. His unique approach to solving trade problems has been called "Wyckoff Theory". This technique taught traders to choose profitable market positions correctly and manage risks even within the technical limits.
Wyckoff achieved unprecedented results in trading. He published a book on this method, which is considered the first complete textbook on stock trading. It is worth noting that Richard Wyckoff developed his theory before the start of the Great Depression, but even today his technique works.impeccable. He was the first to combine all existing trading techniques into one system and created a complete step-by-step guide based on it.
Founder of the VSA
Richard Wyckoff is considered the founder of the VSA method. In short, his theory enables the trader to determine the most profitable moments of entry and exit from the market. Understand how participants change trades and how price action is formed. The VSA trading method focuses on greed and fear. The author suggests that psychological factors play an important role in market formation. After all, no matter how you look at it, every bidder is afraid of losing his investment, but at the same time wants to get more profit. What before, what now the basic human aspirations remain unchanged. Therefore, the Wyckoff method even today works like clockwork. Only those who can soberly assess the current situation in the market can make a good profit. The VSA method will be a good helper in this matter.
Terminology
VSA stands for Volume Spread Analysis. If translated literally - “spread and volume analysis”. These are the variables used by proponents of the VSA method:
- Volume. Implies the total number of bought and sold contracts within one candlestick.
- Spread. Indicates the difference between the upper and lower (High and Low) indicators of the candle.
In simple terms, VSA traders match trading activity withcandle range. 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.
- Closing position.
- Volumes that are below the chart, in total with the spread and closing of the candle.
- History of changes in spread and volumes.
To put it simply, the main purpose of the analysis is to determine the reasons that affect the price change. Professional market operators create an imbalance between supply and demand in the market. The activity of operators is displayed on the price chart, the main thing is to read it correctly, then you can buy stocks, futures or currencies on more favorable terms.
The VSA method uses the relationship of three variables for analysis:
- Bare. The total trading volume of a single candlestick.
- Spread. Candle range.
- 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 himself.
Unlike other exchange markets, there are no real numbers of traded volume on Forex, since this exchange does not have a centralized place. Still, trading volumes can be analyzed. If they grow, then it is safe to say that a major player has entered the market. When transactions are small, then the main part of the manipulations takes place between traders with small capital. MethodVSA is universal, because it works equally in all time ranges.
Basic Principles
Unlike other indicator systems, where the rules of buying and selling are clearly defined, Volume Spread Analysis is focused on understanding the processes that are taking place. Wyckoff noted in his book that the market will not behave in the same way. Any trade that seems familiar to the trader, because he has already encountered it, may have a completely different outcome.
If we 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 during the distribution process. And to put it even simpler: you need to buy while it's cheap, but the price tends to rise, and you need to sell when it's still expensive, but the price has already begun to decline.
Trading Signals
To correctly calculate the best time to buy and sell instruments, you need to be able to notice VSA trading signals. The Wyckoff method refers to such signals as the weakness and strength of the market, which indicate the end of the market phase. A trader does not need special programs, but only an understanding of how large bidders behave and in which direction they are moving. A beginner should learn how to operate with 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 lot of demand, thenthe cost of the instrument will be underestimated, the assets will develop. If the supply is high, the site will decrease accordingly.
- Study "cause-effect". The effect is the dynamics of the market, and the cause is trading. Accordingly, any dynamics is provoked by trades that are formed by key players. When trades are insignificant, there will be no positive dynamics.
- Analyze "effort-result". Effort is a large amount of demand and/or supply. If there is a large amount of effort in the market, it will develop.
Testing levels
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 they influence the pricing policy. Demand is a price zone in which the number of people who want to buy an instrument is much larger than this price level can accommodate. Offer - a price zone where there are more offered instruments than potential buyers. To understand the basics of testing levels, you should pay attention to the chart:
As you can see, supply and demand are in balance in area A, so those who want to buy or sell assets can do so. The price range here is quite stable. But if you pay attention to area B, you can see that demand has increased. Accordingly, some traders who wanted to purchase a certain instrument remained out of the market. Therefore, area A is denotedas a demand zone (or support area). Further pricing will be based on the indicators of this particular area. Thus, it is possible to retest demand levels and enter the market with minimal risk of loss.
Bar analysis
During its existence, the Wyckoff method has been subjected to various interpretations. Bar-by-bar analysis was built on the basis of his teachings. The Wyckoff method and VSA-analytics, focused on trading activity, allow you to determine the moment when professionals enter the market, that is, the time when demand appears on the market.
For an example, it is better to use the diagram, which displays the graph of the dollar and franc pair.
There is an active rise in the market until a bar (number 1) appears on the chart. On this bar, the volume begins to actively increase, which indicates that professional traders are entering the market. Those who have been on the exchange for a long time have noticed that if the bar is closed in the middle of trading, at a time when there is a high level of demand, those players who bet on the increase will soon be at a loss. Thus, bar number two shows that trading is still ongoing, and bar number 3 indicates a price decrease with a maximum sales volume.
Literature
A lot has been said and written about the VSA. But even if you re-read 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 arewrote books about trading on the stock exchange, the basis of their concepts was the Wyckoff method. It is in this literature that all the secrets of exchange trading are described in detail, which still have not lost their relevance.
Tom Williams was the first to introduce the Wyckoff method to the world. "Masters of the Markets" and "The Untold 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 insecure "suffocation". 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 "Trading in the shadow of the 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 stock of knowledge and a hint of specialized education. It's also a good idea to read D. Hudson's The Wyckoff Method to get a better idea of the technique.
For almost 100 years, the Wyckoff method has been successfully proving its efficiency. Reviews say that VSA works. And it doesn't matter if a person is dealing with real or virtual trading volumes, if he learns how to use this information correctly, he will get an excellent tool for market analysis that will work anytime and anywhere.
