Volume Spread Analysis – How to Apply it Like a Professional Trader

You have likely heard the term Volume Spread Analysis before.  It is often abbreviated as just VSA.

If you have heard of it, chances are you have been put off by how confusing it is.

In today’s article I will show you the simplified and practical way to use Volume Spread Analysis.

Theoretically, you will find that mastering volume spread analysis will take a long time as it gets complex.  However, always remember that theory is not what makes you money in the market.

It is only the beginning, the real secret sauce is perfecting your execution methods and risk management.

 

What is Volume Spread Analysis?

Volume spread analysis is a comparison of the distance between a period high and low to the total volume traded.

That is, what is the difference between the closing price and the open price of the candle.  Furthermore, how does that distance compare to the volume traded?

If you are starting to get confused at this point, hang tight as I will illustrate it with real world examples shortly.

Before you continue, it is recommended to read up on trading volume in this article if you need a refresher or are a newer trader.

 

Volume Spread Analysis – Two Simple VSA Trading Strategies

Before I show you the visual examples of volume spread analysis I want to explain the two strategies.

  1. No demand on up bars
  2. No supply on down bars

I will jump into each of these strategies into more details and illustrate a trade setup to help you better understand volume spread analysis.

Both of these trading strategies work on any time frame. If you are swing trading or day trading, it does not matter.

You will find that volume spread analysis is equally powerful on all time frames and especially effective on multiple time frame analysis.

 

Volume Spread Analysis – No Demand on Up Bars

This simple trading strategy will be very effective when applied to your current strategy.

Remember that not trading strategy is stand alone perfect out of the box. Everything requires constant adjustment and this is just one tool to be combined with others for more precision and success.

 

Volume Spread Analysis – Short opportunity when:

  1. Closing price is higher than opening price for the current bar
  2. Volume is weaker on average than past two days

In the char below you can see an example of this setup on the Apple daily chart.

Volume Spread Analysis - No demand on up bar.

Volume Spread Analysis – No demand on up bar.

 

But how did this trade opportunity workout?

You can see in the next chart that our volume spread analysis was followed by a 6.06% drop in just 8 trading days!  This is an amazing trading opportunity.

This becomes even more profitable when you combine it with options trading.

Learn options trading here >

 

Volume Spread Analysis - Profitable Short Trade

Volume Spread Analysis – Profitable Short Trade

 

 

Volume Spread Analysis – No Supply on Down Bars

Now let’s flip the setup and look at how to use volume spread analysis to catch long reversal trades.

As you can see on the chart below, the candle range (high minus low) is very narrow.  This is a low spread.

At the same time you can see that volume was also weaker than the past two days.

This indicates a lack of selling pressure, and a potential exhaustion of the selling wave.

Therefore, you are looking for a long opportunity.

Once you get your other trading strategy qualifiers present you can try a low risk, high probability long here.

Volume Spread Analysis Strategy (VSA) - Apple Setup

Volume Spread Analysis Strategy (VSA) – Apple Setup

 

You can see that this trade setup generated a whopping 15% return in just 12 trading days.  That is a great return for less than a three week holding period.

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If you prefer to trade more passively, checkout our newsletter, trade ideas and live analysis in the Swing Trader package here >


The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.