EveryBarHasAStoryToTell:

ApplyingVolumeSpreadAnalysisfromthetimeof
Wyckofftocurrentelectronictrading.

HALPC:TheTradersSIG
AlanandKimHerd
October27,2009

Overview
! Pricemovesbarbybar,sometimesdirectly,
moreoftenupordownthendownorup
betweenHighandLowasExpertTradersBuy
LowandSellHigh.
! Discoveringhowthey'retradingbymatching
pricemovementtovolumeandfollowingtheir
leadisaprescriptionforprofitabletrading.

RichardD.Wyckoff
18731934

IntroductiontoWyckoff:
! RichardWyckoffwasastockmarketauthority,
founderandonetimeeditorofthe"Magazine
ofWallStreet"andeditorof"StockMarket
Technique."
! Hisideawasthattheeffectsoftradingon
pricerangeanddirectionoughttobelinkedto
volume.Ifitfailedtodothis,themarketwas
abouttochangeitsdirection.

Ittakestwototrade:Usvs Them

ExpertTraders
! ExpertTraderstradewitheachotheraswellaswith
therestofus.Whenpricegoesupbeforegoingdown,
ExpertBuyersexitcontractsandExpertSellersenter
contracts(SellHigh).Whenpricegoesdownbefore
goingup,ExpertSellersexitcontractsandExpert
Buyersentercontracts(BuyLow).
! Therestofussupplyliquidityandprovide
opportunitiesfortheExpertstotradeatevenhigher
HighsbeforesellingandlowerLowsbeforebuying.

AnalysisofVolumeandPriceRangeisone
wayofdiscoveringhowtheExpertsare
tradingandwecandecideifwewouldlike
togoalongwiththem.

Wyckoff'sRules(1)
1.Pricemovementshouldalwaysbeproportional
tovolume.
"

"

"

"

"

"

"

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LowVolume&PriceUp=Bearish
ModerateVolume&PriceUp=Bullish
HighVolume&PriceUp=Bullish
HighVolume&PriceUpModestly=Bearish
LowVolume&PriceDown=Bullish
ModerateVolume&PriceDown=Bearish
HighVolume&PriceDown=Bearish
HighVolume&PriceDownModestly=Bullish

Bullish
Volume

Bearish
Volume

Bullish
Volume

Bullish
Volume
ExpertBUY

Bearish
Volume

Bullish
Volume

ExpertSELL

ExpertBUY

Wyckoff'sRules(2,3,4)
2.Extremelyhighvolumeusuallymarksa
turningorahesitationpoint.
3.Extremelylowvolumeoftenimmediately
precedesextremelyhighvolume.
4.Amoderatetowidepricespreadcreatedby
moderatevolumeisusuallybullish(implying
fewsellers).

Wyckoff'sRules(5,6,7)
5.Awideadvancecreatedbystrongvolumeis
almostalwaysbullish(implyingstrong
demand).
6.Retestsandcorrectionsshouldbe
accompaniedbygenerallylowervolume.
7.Volumeshouldincreaseonlegitimatebreaks
fromtechnicalpatterns.

VolumeSpreadAnalysis(VSA)
! ModernapplicationofWyckoff'sanalysisof
volumeandtradingrangehasbecomeknown
asVolumeSpreadAnalysis(VSA).

CurrentApplicationofVSA
! AssumesthatExpertBuyersandSellersarethosebest
abletoforecasttheCloseofthecurrentbarandthe
directionoffuturebars.
! Theyenterandexitcontractsatthebestavailableprice
withSellerstradingHighandBuyerstradingLow.
! ExpertBuyersenterandexitcontractsingreater
volumejustbeforeanupwardtrendinpriceandExpert
Sellersenterandexitcontractsingreatervolumejust
beforeadownwardtrendinprice.

ExpertSellers
Enter(SELL)
ExpertBuyers
Exit(SELL)

ExpertBuyers
Enter(BUY)
ExpertSellers
Exit(BUY)

CurrentRulesforVSA(1)
1.Normalizevolumeandpricerangefor10to
30barssuchthataveragechangeinvolumeis
thesameasaveragechangeinpricerange.
(Usestandarddeviationtonormalizevalues.)

CurrentRulesforVSA(2)
2.ComparebarbybarchangeinVolume(dV)
withchangeinPriceRange(d$).

CurrentRulesforVSA(3)
3.AssessBuyingPressurebythelengthofthe
bottomshadowsofcandlestickformations(in
relationtobodyandtopshadow)andSelling
Pressurebytopshadows(inrelationtobody
andbottomshadow).

ExpertSellers
Enter(SELL)
ExpertBuyers
Exit(SELL)

ExpertBuyers
Enter(BUY)
ExpertSellers
Exit(BUY)

SellHigh

BuyLow

CurrentRulesforVSA(4)
4.UsePricebarstructuresandCandlestick
formationsinassociationwithproportionately
High,AverageorLowVolumestoidentify
pricetrends,retracements,reversalsand
congestionthatareconsistentandspecificto
eachmarket.

DeliberatePractice(1)
! BackTesting:

"

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PositionChart lastdayatrightedgeofScreen
VSAAnalysismadeandrecorded
Forecastmadeandrecorded
Movechart,checkandrecordresults
Nextday VSAanalysis
etc.

DeliberatePractice(2)
! ForwardTesting:

"

"

"

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CurrentChart currentdayrightedgeofScreen
VSAAnalysismadeandrecorded
Forecastmadeandrecorded
DaybyDay checkandrecordresults

References
StewartTaylor:SimplerisSimplyBetter
!

"

http://tv.ino.com/media/INLV98ST/workbook.pdf

KarthikMarar:VolumeSpreadAnalysis
!

"

http://www.financnik.cz/forum/file.php?13,file=10989

VSA(PartIandII):ANewWaytoLookatMarkets

"

http://www.forexfactory.com/showthread.php?t=154339&page
=20

TomWilliams:MastertheMarkets
"

http://www.tradethetruth.com/pics/mtmv3.pdf

Resources
! CommercialWebsites:
" http://www.tradeguider.com/
" http://www.hawkeyetraders.com/

! TradingGroups:
" http://www.traddr.com/group/wyckoffandvolume
spreadanalysis

EALcodefornormalization(1)
Input:Length(20);
Variables:avg_V(0),dV(0),avg_dV(0),stD_dV(0),dPr(0),
avg_dPr(0),stD_dPr(0),rVtoPr(0),adj_dPr(0);
avg_V =Average(Volume,Length);
dV =(Volume avg_V)*Adj_V;
avg_dV =Average(dV,Length);
stD_dV =StdDev(dV,Length);

EALcodefornormalization(2)
IFClose[0]>=Close[1]AND(HighClose[1])>=(Close[1]Low)
THEN
dPr =(HighClose)+(HighLow)+(OpenLow);
IFClose[0]>=Close[1]AND(HighClose[1])<(Close[1]Low)
THEN
dPr =(OpenHigh)(HighLow)(CloseLow);
IFClose[0]<Close[1]AND(Close[1]Low)>=(HighClose[1])
THEN
dPr =(OpenHigh)(HighLow)(CloseLow);
IFClose[0]<Close[1]AND(Close[1]Low)<(HighClose[1])
THEN
dPr =(HighClose)+(HighLow)+(OpenLow);

EALcodefornormalization(3)
avg_dPr =Average(dPr,Length);
stD_dPr =StdDev(dPr,Length);
rVtoPr =IFF(stD_dPR <>0,(stD_dV/stD_dPr),1);
adj_dPr =dPr*rVtoPr;
Plot1(dV,"diffVol");
Plot2(adj_dPr,"adj_dPr");
Plot3(adj_dPr*1,"adj_dPr*1");
Plot4(stD_dV,"stD_dV");

THEEND
ThatsAllFolks!