Volume Spread Analysis

The most common methods of analysis of the Forex training market are the fundamental analysis and the technical analysis. Fundamental analysis deals with the question of why things happen in the market while the technical analysis attempts to predict when it will take place.

When these two are combined a third approach to analyzing the market can be seen that answers the questions ‘when’ and ‘why’ simultaneously. This is known as the volume spread analysis. VSA or the volume spread analysis deals with establishing the cause of the price movements. These are based on the supply and demand of the market which is the cause for the price differences that is created primarily by traders’ actions.

The charts will show the activity of the traders in the market. Volume spread analysis takes into consideration the supply and demand in conjunction with the probable path of the market in the near term. These three variables that can be seen here are the amount of volume on a price bar, the range or the price spread of that bar and the closing price on the spread of that bar.

The volume indicates the amount of activity on each individual bar. A price bar that shows a lot of activity indicates heavy trading while little activity indicates that the traders are withdrawing from trading. This can be seen clearly as supply and demand on the charts and helps traders determine the short to medium term direction of the market. This principle is universal to all markets and timeframes.

All markets operate on supply and demand. When traders are buying more than they are selling the market is said to be moving up and when the traders are selling more than buying then the market is said to be moving down. Although this sounds simple there is more to it than just simple buying and selling. For the market to show a true uptrend there has to be more buying than selling as we have already stated although this by itself is not sufficient to keep the uptrend. It is also required that the there is an absence of major selling in the market so that there is no substantial pullback of the buying trend consequently allowing the market to move up. VSA can thus be named as the study of supply and demand market forces and the manipulation of these forces through crowd behavior psychology. It is the study of price action in relation to volume.

The markets show periods of consolidation when the supply in the market is almost equal to that of demand and trending periods when the markets show a phase of accumulation or distribution where there is an imbalance of supply and demand. It is generally during these periods of accumulation and distribution that markets can be easily manipulated.