Crowd Behavior

In this lesson you will learn how the marketrs are

manipulated through some simple, yet extremely powerful,
psychological factors.
People come to the markets hoping to catch some "easy
money" or to "get rich quick". Sometimes it takes a lot of
money, but it doesn't take much time to find out how wrong
they are. Crowd behavior can help you a great deal in
understanding how the markets really work. The markets
trade on the sentiment of the crowd and the crowd's
sentiments are based on emotions. In the final analysis,
people trade based on one emotion: fear. The markets
manipulate this emotion.
The term Collective Behavior refers to social processes
and events which do not reflect existing social structure
(laws, conventions, and institutions), but which emerge in a
"spontaneous" way...Collective behavior, a third form of
action, takes place when norms are absent or unclear, or
when they contradict each other.
The crowd, or herd, or retail trader, has exhibited
behaviours that have proven to be consistent over time.
From the above definiton of Collective Behavior, these
behaviours can be boiled down to two primary reactions to
market changes: one is spontaneity, which is better defined
as panic, and the other is confusion. Both are derivitives of
fear and the product of being uninformed about the most
important underlying process of market dynamics psychology.
[WikiBooks]

Greed leads to price chasing and over-trading. The crowd

sees the market making a large move and they panic,
fearing they will miss out on some quick, easy profits. As a
group, they usually pull the trigger just as price has reached
the top or bottom. Then they are confused why this keeps
happening to them. They wait, watching the market move
swiftly the other way and jump in again. Or, after suffering
as losses mount, they get out only to see the market
suddenly turn back, making gains in the direction they just
exited and leaving them even more confused.
What is being referred to by "the Crowd" is the largest
group of traders and, as a group they make decisions based
on emotions. As a group they possess the greatest amount of
capital (liquidity) in the markets and are the easy pickings
for the professional group we'll be defining later as Smart
Money (SM).
When comparing individual professionals to individuals in
the crowd, the professionals have relatively enormous funds
at their disposal. When comparing groups, the crowd has the
greater amount of funds by far. Trying to control a market
on a dollar for dollar basis would be futile for the
professional. They don't have enough money to control a

market, but they do have enough to cause psychological

reactions in the crowd.
Anyone who is confused as to how the markets work is easily
manipulated. Confusion feeds fear and fear breeds panic.
Fear comes in two forms: the fear of losing money and the
fear of missing out on a big move (greed). This works in
every scale and time frame.
Charles Mackay's famous book, Extraordinary Popular
Delusions and the Madness of Crowds, is a collection of
stories about crowd behavior in the market place. The
stories can be seen working on charts everyday. An enduring
bull market leads the crowd to believe the trend cannot end.
Such optimistic thinking leads the crowd to overextend itself
in acquiring the object of the mania. Eventually, fear takes
hold when they start to realize the market is not as strong as
they thought. Inevitably the market collapses and the fear
turns to panic.
This is the nature of the crowd: a collection of usually calm,
rational individuals getting overwhelmed by emotions. Those
who study human behavior have repeatedly found that the
fear of missing an opportunity for profits and the fear of
great loses easily outweight rational behavior. At its
fundamental level, these fears consistently overwhelm the
crowd.
"Perhaps never before or since have so many people taken
the measure of economic prospects and found them so
favourable as in the two days following the Thursday [24th
October 1929] disaster". J.K.Galbraith - The Great Crash
1929. However, "On Monday the real disaster began".

The disaster of 1929 continued down, then up; horror, then

hope, then horror, for 6 months. It sunk the bulls, the
speculators, the bottom fishers, the momentum trackers, the
chartists, the value investors - everyone. Virtually no-one
who had ever been involved in the markets came out of the
other side with any money at all.
It is crowd psychology that forms the basis of professional
manipulation: selling when the crowd is buying and buying
when they are selling. Professional manipulation could not
work if the efficient market hypothesis were true, since
prices would only be determined by fundamentals.
ThisMatter.com, in an article about market sentiment,
describes it like this:
To explain these market dynamics, the market is conjectured
to be primarily composed of 2 groups: informed players and
the much larger group of uninformed players. The informed
player is considered to be the professional, who understands
the valuation of assets according to fundamentals, but the
uninformed players have little or no understanding of asset
valuation, and, thus, is not a factor in their buying and
selling decisions.
There are also liquidity players, who are market participants
that buy or sell, not because of market forecasts, but
because of organizational objectives or because they need
the money, as when a pension fund needs to make payments
to retirees or a mutual fund needs to sell to pay for
redemptions, However, liquidity players are not thought to
have a significant effect on prices most of the time, because
their actions, motivated by individual needs, are not
concerted.

Since the uninformed masses are a much larger group, they

also have more money, and, thus, are a more important
determinant of market prices. Hence, because market
sentiment seems to be more important in the pricing of
securities than fundamentals, a trader who accurately
forecasts market sentiment will be more successful than one
who only considers fundamentals. In this way, even informed
players are swayed by the crowds.
As you can see, crowd behavior is no secret to the
professional trader. The crowd still reacts to the market
based on their emotions of greed and fear - and the
professionals use this against them. For the professional,
profits come, not so much from market analysis and
technical indicators, it comes from manipulating the greed
and fear of the crowd.
The "Psychology of the Crowd" is the second guiding
principle of Smart Money.

Smart Money Defined

In this lesson you will learn who comprises the group we
shall be calling Smart Money (SM).
Volume Spread Analysis (VSA) is the study of the market
forces of supply and demand and the manipulation of those
forces through the psychology of crowd behavior. The cause
of price movement is the imbalance between supply and
demand in the market. This imbalance is created by the
activity of Smart Money.
Richard D. Wyckoff carefully studied the Smart
Money traders of his time and discovered that all markets

are moved by the big players he called the Composite

Operator (CO). Of course there are many deep pocket
traders who make up the CO, but it is much easier to
consider them all as a single entity. Among these traders
are Market Makers, Specialists, Institutions, Large
Traders (see The COT Report) who provide liquidity for
Commercials hedging a market, and, with the ever
advancing computer systems, Dark Pools, and the
mathematical whizzes known as Quants.

Simply put, Wyckoff felt that an experienced judge of the

market should regard the whole story that appears on The
Tape as though it were the expression of a single mind. He
felt that it was an important psychological and tactical
advantage to stay in harmony with this omnipotent player
the so-called composite operator. The successful trader
must endeavor to ascertain what is in the back of the head
of that fellow and to anticipate his moves; for he is
constantly expressing his intentions by what he does and the
way he does it; by the urgent or leisurely character of his
buying or selling; by the volume of the stocks he deals in,
the width of their swings, especially in the leaders.
Referring to this group as Smart Money has advantages.
Whether Smart Money is working as an individual such as a

Market Maker or a group of analysts within an institution

such as a bank, they have more information, extensive
training and experience, super computers with massive
amounts of data, and a huge fund of money. They do not
have to be in direct communication to work as a CO, but
their goals are the same - profit. Combine this with the same
or very similar conclusions about the present state of supply
and demand and their moves in the market will naturally
seem coordinated and this coordination will result in the
massive movement of funds. (Some who specialize in the
Forex markets think these markets are too big for SM to
manipulate - that is their lose. (pun intended))
Before moving on, it is important you thoroughly understand
this concept of the SM trader. As an individual or group in
an institution, they are first and foremost SMART. They
do not work haphazardly or intuitively. They plan and then
launch, with military precision, a campaign to get their
price. Who do they get their price from? The herd. So this
"campaign" is psychological in nature.
Basically they all work the same way and it adds up to one
entity: SM, with lots of money. By studying the actions and
reactions of SM you can understand their behavior. By
learning their methods for conducting a campaign, you can
follow them and add your money to theirs when they make a
move.
If you don't agree with the concept of a CO or SM, then the
rest of this course is not for you.

Smart Candlestick Patterns

The three lessons in this module are to help you gain the
correct perspective for trading the markets using VSA.
Along with this new perspective, you should develop a new
attitude: a predatory attitude where you join Smart Money
in their campaign to relieve the crowd of their cash. These
lessons may touch on some topics you are unfamiliar with,
but they will be covered in detail in later lessons. For now,
just focus on mentally separating yourself from the crowd so
you can follow in the footsteps of Smart Money.
When studying candles there are a few principles you should
understand. The first is the terminology being used. Most of
the literature refers to a candle that is going up in price as
Bullish and when going down as Bearish. This can be
confusing because it is only half the story. Keep in mind that
there are basically two opposing groups at work in the
markets, the "Dumb Money" (the crowd or herd) and the
"Smart Money" (big money including the manipulators institutions, fund managers, specialists, market makers,
dark pools, Quants, etc...). Basically: for every buyer in the
market there is a seller.
From this larger perspective, the "Bull" and "Bear"
terminology refers to the crowd/herd mentality - Dumb
Money (DM). Continuing from this overall perspective, it is
generally understood that the Smart Money (SM) is thinking
opposite of DM. So, if a security or market is said to be
"bearish", the SM is thinking about buying, their
"contrairian" sentiment is actually "bullish".
To make trading easier you have to stop thinking from the
DM perspective. The SM perspective thinks in terms of
Suppy and Demand. And, from this perspective,
Accumulation and Distribution refers to the activities of the

smart money. When dumb money is bullish, smart money has

already bought (at the bottom) and has an over-Suppy of
stock and is, therfore, turning to a phase of Distribution selling.
Check this graphic from tradingday.com

Where SM thinks opposite of DM, DM does not think

opposite to SM. Based on emotions, DM reacts to SM. The
two emotions at work with DM are fear and greed.
For beginners this perspective is especially hard to grasp
because most, nearly all, of the trading literature is written
from the DM perspective. Take this description in a tutorial
given at Tradingday.com
"Now there is only one reason why traders would increase
demand by stepping up to buy the stock, and that is because
they think that the stock will go up in the near future. So by
observing the candlestick color and size, the astute
candlestick reader is able to deduce exactly what other
traders are thinking, and that is that they think the stock
price will go higher in the future."

As noted in the graphic, the SM (Sellers) already owns the

stock and is gradually selling at higher and higher prices.
When the DM (Buyers) are glowing with greed, the SM will
induce fear by short-selling the stock. The price will stall,
DM will start getting out of their long positions, then the
price will start down.

SM will begin covering their short positions (Buying) at

lower and lower prices. Finally, when price is much lower,
SM will start accumulating a new supply of stock - going
long.
DM will look at a candlestick pattern trying to guess if it
means the price will rise or fall. For the SM it is merely
watching supply and demand to see if it's time for
accumulation or distribution.
For instance, take the four different consolidation patterns
of candlesticks. They are 1) Bearish Continuation, 2) Bullish
Continuation, 3) Bearish Reversal, 4) Bullish Reversal.
Though these use the DM terminology, you must learn to
interpret them as SM and see the accumulation or
distribution phases.

Tradingday.com describes describes these in the usual way,

for instance: The Bearish Continuation Consolidation
Pattern:
"Several strong bearish candlesticks precede the Bearish
Continuation pattern where the bears are clearly in control
(Figure 12).
"The bears and bulls then begin to battle by pushing the
stock up and down in price in a tightly formed consolidation
zone.
"The narrowing size of the candlesticks toward a line of
support indicates that the bears are winning the battle. The
bulls finally weaken and allow the bears to penetrate the
line of support, at which time the bears quickly conquer new
territory by taking the stock to lower prices.
"By recognizing the consolidation pattern the trader is able
to short the stock just after the stock breaks the line of
support, and profit from the sharp move downward.
"The cause of the sharp sell off is fueled by the emotions of
the traders watching for the outcome of the battle. Traders
who bought the stock in the area of consolidation in hope of
a rally off of support, are now scrambling to exit their losing
positions."
Meanwhile, SM is accumulating at lower and lower prices.
Without having big money you cannot trade exactly like SM.
But by watching SM through this perspective of how to read
candlesticks will better enable you to trade without greed or
fear and, hopefully find the "sweet spots" for greater gains.

It is advisable to study the basic candlesticks and their most

reliable patterns in the context of supply and demand. This
short cut will add strength to your chart reading.

The Case against Candlesticks:

Most of the following lessons will be referring to only
the HIGH, Low and Close (HLC) of price-bars from barcharts, not candlesticks. The first two graphics will show
how this is applied to candlestricks where the greencandlestick represents the Close being higher than the Open
and the red-candlestick is the Close lower than the Open.
Since the Open is of no consequence in VSA, the price-bars
are visually easier and less distracting. As seen below, the
up and down candles are structurally the same. The pricebars, beside them, are much different and, on some
platforms (see below), can be color-coded to give more
information than simply whether the Open or Close was
higher.

An UpClose Bar is different than an UpBar. The UpClose

means that price Closed in the upper 30% of the price-bar.
Whereas, the UpBar Close is higher than the Close of
the previous bar.

Continuing:
MidClose the close is between 30%-70%
WideSpread If the spread is about 150% of average in the
present range.

NarrowSpread if the spread is about 50% of average in

the present range.

Richard Wyckof
Richard Demille Wyckoff (November 2, 1873 March 19,
1934) was a stock market authority. In the October 2002
issue of Technical Analysis of Stocks & Commodities Richard
D. Wyckoff was named one of the five Titans of Technical
Analysis. From the man who didn't think much of chartist, he
became the premier chart reader of our time. There
are purists who run forums dedicated to his approach. There
are those who have adapted his methods and built platforms
such as Tom Williams' Volume Spread Analysis with Trade
Guider and Todd Kruger's new platform using Wyckoff
Candle Volume Analysis. And there are those who have
created dozens of indicators based on his approach.

Wyckoff went to work on Wall Street as a young man. He

was very successful and soon owned his own brokerage firm.
He also printed an extremely popular market letter. In
addition, Wyckoff published the nation's first financial
magazine entitled "The Magazine of Wall Street". In
addition, he developed a significant stock advisory service
and employed a large analytical staff. Though Wyckoff died
in 1934, thecourse he wrote in 1931 is still being sold for
$1000 today. In 1985, the Wyckoff Method became part of
The Graduate Certificate in Technical Market Analysis at
Golden Gate University in San Francisco, California, USA.
Wyckoff's research claimed many common characteristics
among the greatest winning stock market traders of the
time. Continuing as a trader and educator in the stock,
commodity and bond markets throughout the early 1900s,
Wyckoff was curious about the logic behind market action.
He was a contemporary of Jesse Livermore (Reminiscences
of a Stock Operator). The Wyckoff Method is essentially a
codicil of the best practices reported in Reminiscences. Like
Livermore, Wyckoff was a keen observer and reporter who
codified the best practices of the celebrated stock and
commodity operators of that era. Through conversations,
interviews and research of the successful traders of his time,
Wyckoff augmented and documented the methodology he
traded and taught. Wyckoff worked with and studied them

all, himself, Jesse Livermore, Gann, E. H. Harriman, James

R. Keene, Otto Kahn, J.P. Morgan, and many other large
operators of the day. The Wyckoff Method may provide some
insight as to how and why professional interests buy and sell
securities, while evolving and scaling their market
campaigns with concepts such as the "Composite Operator".
"He (or she) must study the various swings and know where
the market and the various stocks stand. One must
recognize the inherent weakness or strength in the prices
and understand the basis or logic of movements. He (or she)
should recognize the turning points of the market.
As Wyckoff became wealthier, he turned his attention and
passion to education, teaching, and in publishing exposs
such as Bucket shops and How to Avoid Them, which were
run in New York's The Saturday Evening Post starting in
1922. Starting as a tape reader, Wyckoff developed a
practical, straight forward bar chart and point-and-figure
chart pattern recognition method that has stood the test of
time.

Wyckof's Three Laws

The mechanics of the markets are so complicated that one
must break it down into some foundational guidelines that
encompass the whole, then build upon that foundation
slowly and methodically until it makes sense and becomes a
high probability, low risk undertaking. By now you should
understand the advantages Smart Money has over the
crowd and you should be looking at the market from their
perspective. The rest of the lessons will focus on the
methods Smart Money uses and the Market
Dynamicsthose methods are based on.

Richard D. Wyckof devised three laws that govern market

dynamics. These laws tell you how and why the markets
work. The law of Supply and Demand is the most
fundamental and overriding aspect of market dynamics. The
other two laws act on and measure Supply and Demand.
Warning: Do Not discount these as they are the very Heart of Chart Reading.

The Law of Supply and Demand

This law states that when demand is greater than supply,
prices will rise, and when supply is greater than demand,
prices will fall. Here the analyst studies the relationship
between supply vs. demand using price and volume over
time.
The price of every equity moves up or down because there is
an excess of demand over supply or supply over demand. 2.
The Law of Effort vs. Results - divergencies and
disharmonies between volume and price often presage a
change in the direction of the price trend.
The Law of Efort versus Result
The law of effort vs. result states that the change in price
[spread] of a trading vehicle is the result of an effort
expressed by the level of volume and that harmony between
effort and result promotes further price movement while
lack of harmony promotes a change in direction.
The Law of Effort (volume) versus Result (price) in action.
This law can be seen as working on one bar.

The Law of Cause and Efect

This law states that in order to have an effect you must first
have a cause, and that effect will be in proportion to the
cause. This laws operation can be seen working as the force
of accumulation or distribution within a trading range that
works itself out in the subsequent move out of that trading
range.
The idea is to measure this cause and project the extent of
its effect. The excesses that develop in supply and demand
are not random but are the result of key events in market
action or the result of periods [candles] of preparation.
Wyckoff teaches what these developments are and how to
judge when they are unfolding in time to take advantage of
the excesses in supply or demand that will follow.
This law is seen working over a group of bars.

Redmont gives a simple example:

"You are looking at a stock. It trades 10,000 shares and goes
up one point on the first day. [You see the effort and result.]
The same thing happens on the second day. On the third day,
it trades 20,000 shares and goes up 1 point. On the fourth
day, it trades 40,000 shares and goes up half a point. On the
fifth day, it trades 80,000 shares and is unchanged. [This
group forms a cause the effect of which is Demand becomes
exhausted.]
"On the third day, you had to exert twice as much effort to
get the same result (as the first day)," Redmont noted. "The

key to analyzing supply and demand is that the demand side

burns itself out.
"When the buying is through and satisfied-there is always
supply there. That's why prices go down faster-because
supply is always there and demand is not. All you have to do
is withdraw people who want to buy and prices fall."

Wyckof: By the Numbers

This lesson will build on the foundation of Wyckof's Three
Laws with his Two Goals for Money Management,Five Steps
to Trading and The Five Qualities of a Speculator.

The Two Goals for Money Mangement

These are simple yet the absolute, most important mindset
every trader must have to be successful.
The first goal is to Make a Profit on a consistent,
worthwhile basis. It is not enough to just make gains, the
gains must be worthy of your time, risk, and end with
excessive capital. Don't waste your time on a certain winner
if the gains will be mediocre. Hold that capital ready and
spend that time finding a better trade. Smart Money (SM)
will not move until the conditions are right. They will run
tests (more on this later) to determine the market readiness
for the move. Don't have your cash and hopes tied up so you
miss their signals.
The second goal is the Preservation of Capital. Manage
your risk with stops and never enter a position without a

predetermined exit strategy.

To preserve their capital, SM runs tests. They do not have to
be in direct communication to coordinate their effort; they
just understand the dynamics of the market and, by trading
accordingly, it seems they are working in concert. In earlier
lessons you learned that, as a group, SM has massive funds
at their disposal. Based on the almost certainty they will
make huge gains, they can afford to run necessary tests. You
also learned that, as a group, the herd has more funds than
SM, but this group is uncoordinated and over-reactive.
It is estimated that at any one time 95% of retail traders are
on the losing side of a trade. Your goal is to be among the
other 5%. This is accomplished by following in the
footsteps of SM. And, being unable to run your own test, you
must use sound money management principles. No one and
no group is infallible - not even the best of SM. Sooner or
later, everyone makes mistakes. With sound money
management, some retail traders have made quite
substantial gains with accuracy rates as low as the 30%
range.

The Five Steps to Success

Step 1: Know the trend of your security and how it relates
to the general market?
Step 2: Is your security in harmony with the market. That is:
in an uptrending market is your security showing strength,

in a downtrending market is it showing weakness?

Step 3: Does your security show a cause that will produce
an acceptable effect?
Step 4: Is your security ready to move (phase)?
Step 5: Time your trades with a change in the market using
the three laws that govern all market behavior.
"A good idea is to include seven steps: visualization for step
one, followed by Wyckoffs 5 Step Method, and then some
type of after-action review." StockMarket-Operator.Com

The Five Qualities of a Speculator

(1) Self-reliance: a man must think for himself, must follow
his own convictions. Self-trust is the foundation of successful
effort.
(2) Judgment: that equipoise, that nice adjustment of the
faculties one to the other is essential to the speculator.
(3) Courage: confidence to act on the decisions of the
mind.
(4) Prudence: the power of measuring the danger, together
with a certain alertness and watchfulness, is very important.
There should be a balance between the two.
(5) Pliability: the ability to change an opinion, the power of
revision.

"Habits are safer than rules; you don't have to watch them.
And you don't have to keep them, either. They keep you".
(Frank Crane)

The Market Forces of Supply and Demand

This lesson is a brief introduction to The Market Forces of
Supply and Demand as seen through Volume Spread
Analysis.
Warning: This is a major step towards seeing the markets through the eyes of SM.

First, the basics from Investopedia:

Supply and demand is perhaps one of the most fundamental
concepts of economics and it is the backbone of a market
economy. Demand refers to how much (quantity) of a
product or service is desired by buyers. The quantity
demanded is the amount of a product people are willing to
buy at a certain price; the relationship between price and
quantity demanded is known as the demand relationship.
Supply represents how much the market can offer. The
quantity supplied refers to the amount of a certain good
producers are willing to supply when receiving a certain
price. The correlation between price and how much of a
good or service is supplied to the market is known as the
supply relationship. Price, therefore, is a reflection of supply
and demand.
Markets move off of the imbalance of supply and demand.
This is what VSA identifies so clearly on a chart: <i>an
imbalance of supply and the market has to fall; an imbalance

of demand and the market has to rise.

Accumulation from the Supply/Demand perspective is
demand coming in to gradually overcome and absorb the
supply and to support the market at this price level.
Distribution from the Supply/Demand perspective is where
the Supply overcomes Demand and stops the upward move
and eventually begins the downward move. Distribution
refers to the elimination of a long investment or speculative
position and often involves establishing a speculative short
position by professional interests in anticipation of a decline
of price. In the distribution area the professional investors
or speculators who had previously bought stock, sell there
stock to the public. The public buys and it generally buys
because of good news of various sorts. Good news on the
company, its product, the economy or any news which will
entice untrained people to rationalize there buying decision.
The best news of all is the advancing of the price of a stock.
There is an important relationship between supply/demand
and price. But there are also other determing factors in a
market. To illustrate: suppose brand new Fords are selling
for $20,000. This means demand will step in for that
commodity at that price. But, suppose, a Ford is being
offered for less: $10,000. Just considering supply and
demand, one would think that demand would grab it up.
Now lets consider some other factors. In the first instance
we find that the the Fprds are all pickup being sold in a
ranch community. While, in the second instance the Ford is
ten years old and has been in a wreck. In this case demand
might not step up at the offered price - or any price.

Now looking at the first case: The Ford dealer understood

the communities expectations and supplied those
expectations. In the second case, buyers were lkooking for a
bargain, but expect to find something drivable at that price.
There expectations were not met and, even though there
was supply at their price, demand was never created.
For VSA to work, you must know the circumstances of the
supply at a given price level and the expectations od demand
at that price level.
Without any other considerations:
The Law of Demand states, the lower something's price is,
the more demand there is for it and the relationship between
demand and price is an inverse relationship. As one goes up,
the other comes down.
The Law of Supply states, the higher something's price is,
the more it will be supplied and the relationship between
supply and price is a direct relationship. As one goes up, the
other goes up.
Now consider the following chart:
This image has been resized. Click this bar to view the full image. The original image is sized 720x562.

There is nothing in the chart that hints at the reversal at

point A. Price has passed a former demand zone and volume
is regular. Then (B, the blue box) comes and area of
consolidation lasting more than three weeks with tight
spreads and slightly lower volume. Then, suddenly (C),
volume is up and so is price. In a discussion on this at IFT,
Tekmnd explains point C very well:
"Supply and demand is the basic foundation of economics
However,...Supply and demand is the effect, not the cause.
Something happens, and supply increases or demand
decreases (or both) causing price to go down, or something
happens and supply goes down or demand goes up (or both)
causing price to go up.

The "something" is the cause, and the change in

supply/demand is the effect.
So, yes, price went up on USD/JPY because of an increase in
demand for the pair. However, it is the cause for the change
in supply and demand that caused the price change.
In fact, when you boil it all down, trading is the perception
and speculation of what the change in supply and demand
will be.
To put it another way, its not like a huge bunch of people
coincidentally decided to buy this pair at the exact moment
the Japan Central Bank makes an announcement that will
cause the supply of Yen (the currency in circulation) to be
increased by billions of Yen."
[I highly recommend his course at Free Forex Academy]

So, at point A the insiders (other banks in Japan) are told of

the discount rate change coming and price shoots up on the
dollar against the yen. At area B they wait for the public
announcement, then price shoots up again at point C. There
was a fundamental change that changed expectations that
changed the balance of supply/demand and moved the price.

Wyckoff's third law: The Law of Cause and Efect

This law states that in order to have an effect you must first
have a cause, and that effect will be in proportion to the
cause. This laws operation can be seen working as the force
of accumulation or distribution within a trading range that
works itself out in the subsequent move out of that trading
range.

The idea is to measure this cause and project the extent of

its effect. The excesses that develop in supply and demand
are not random but are the result of key events in market
action or the result of periods of preparation.

More from Tom Wiliams and becoming a Predator:

<i>Admittedly easy to identify in hindsight bar by bar. The
important point is to keep in mind is that all the indications
of weakness must have been there in the first place, as the
market was unfolding day by day. You will no doubt have
difficulties in analysing a chart as it unfolds bar by bar until
you have trained your mind to think like a predator rather
than run and act with the Herd. Practically all these up bars
on this chart will be accompanied with 'good news' of some
sort. If there is no good news available the news media will
simply make it up to explain away the sudden up move taken
place on any particular day. Your subconscious mind will be
busy absorbing this information whether you like it or not
and forming an opinion. To the untrained mind that view will
be bullish, therefore you will not have even noticed volume
implications telling you otherwise.</i>

Volume Analysis
In previous lessons you gained a new perspective for looking
at Candles, Chart Patterns and Indicators. Use that
perspective while studying this lesson to establish a clear
understanding of what volume means.
The definition of volume:

In the stock market, volume refers to the total number of

shares that exchange hands over any given time period. In
any volume bar several types of transactions might be
taking place all at once. They are : buying, covering short
sells, selling, selling short.
VSA is not volume analysis, price spread analysis, nor
volume and price analysis on a single bar or candle. For
instance: high volume on an up move does not necessarily
mean the next move will be up. There could have been
hidden selling within that move. By itsself and on a single
bar, volume only shows the relative amount of activity on
that bar. But, in context with other information, volume
is the most powerful indicator in the final analysis
before taking a position.
"It [volume] is often looked at for confirming evidence of
price trend and price reversal patterns. For patterns such as
triangles that are the product of a period of indecision or
consolidation in stock price, volume is usually light during
the formation of the pattern and increases on a breakout
from the pattern. For any pattern or trendline penetration, a
breakout with increasing volume is more an indication that
prices will continue in the direction of the breakout than a
breakout on low volume."
[Trade10.com]

This is a good time to introduce Tom Williams' perspective

on The Path of Least Resistance:
1. It takes an increase of buying (demand volume),
on UpBars, to force the market up. The appearance ofNo
Demand (low volume) on an up-move, shows little or no
buying.

2. It takes an increase of selling (supply volume),

on DownBars, to force the market down. The appearance
of No Supply (low volume) on a down-move shows little or
no selling pressure.
Which means, if there is no trading going on in one
direction, the path of least resistance is generally in the
opposite direction.
VSA is the combination of analyzing volume to the price
spread and close in the context of the background which
includes the general market and multiple timeframes.
In general low volume is the playground of Smart Money.
This is where they have the resources to run tests to
discover the degree of supply or demand, or set traps and
shakeouts against the greater resources of the Herd and
trying to create as much confusion in the Herd as
possible. High volume means that Smart Money is
decided and working at a specific purpose of manipulating
the crowd psychologically: they are inducing fear and
gaining greater profits.
Volume is the single most powerful confirming technical
indicator because it is the only indicator which is not
calculated from price. Strong volume during trading day
indicates important market action. You have to pay
particular attention to market action when you see high
levels of volume during these situations:
1. The market is breaking a significant level of support
or resistance.
2. The market is bouncing from a significant level of

support or resistance.

Do you see where the arrows point to important volume and

when it happened?
a. high volume when bouncing from support level
b. high volume during breakout of trendline resistance
c. again high volume during bounce from support
d. breakout of horizontal resistance with above average
volume
But you can also find above average volume in situations
when a trend is already running.

Price Analysis

In this lesson on analyzing price and it's spread, it is

important to understand the causes that effect changes in
the Price Spread. Since Richard Wyckof, the make up of
the individuals and institutional traders that made up his
"Composite Operator" has somewhat evolved. With
internet access, the markets have become internatonal and
trading in some markets such as futures and forex are open
24 hours. Computers have advanced and are programmed to
trade and, through artificial intelligence, to learn patterns
and evolve their own systems. Other groups, with special
access, form Dark Pools of funds. Lager institutions such as
banks and other hedge funds have hired mathematical
wizards called Quants who work on analyzing the markets
through super computer modeling and devising special
instruments (such as CDSs), and trade with huge amounts of
money that is highly leveraged. They quantify, even create
markets, then move them.
The centerpoint in all this are the Market
Makers (MM)and Specialists. They are responsible for
keeping their markets liquid for the buying and selling of
securities. A Market Maker is a bank or brokerage company
that maintains an ask and bid price. In Wkipedia's
description you'll see how those responsible for liquidity in
the markets first have job to do, then they have hope.
"A market maker is a company, or an individual, that quotes
both a buy and a sell price in a financial instrument or
commodity held in inventory, hoping to make a profit on the
bid/offer spread, or turn."
In that description you see that they are "hoping to make a
profit". Basically they make their profits by taking the
difference in the Ask-Bid spread. They often must provide

liquidity by taking the other side of some transactions - and

they often find opportunity to enter transactions for the
simple purpose of making a profit for themselves or their
firm. With a little hair splitting, the "hope" is exactly the
same as everyone elses, including the SM - they are, in fact,
functioning as SM. So, when referring to SM, this includes
this aspect of these professionals. That is, their profit motive
as seen by their stepping in to buy or sell (a cause) makes
them adjust the price spread formula (the effect) up or
down.
When a buyer's bid meets a seller's offer or vice versa, the
stock exchange's matching system will decide that a deal
has been executed. In the United States, the New York Stock
Exchange (NYSE) and American Stock Exchange (AMEX),
among others, have Designated Market Makers, formerly
known as Specialists, who act as the official MM for a given
security. The MM provide a required amount of liquidity to
the security's market, and take the other side of trades when
there are short-term buy-and-sell-side imbalances in
customer orders. This helps prevent excess volatility, and in
return, the MM is granted various informational and trade
execution advantages.
Under normal conditions the MM lets the computer handle
all the orders coming in based on a Bid/Ask formulas (see
below). When the market gets out of hand the MM can stop
all transaction until they can reestablish order. They may
also adjust the formula to gain profits for their firm or to
accomodate orders from special clients of their firm.
In general this is how it works:
Bid Price

The bid price represents the highest priced buy order that is
currently available for the market (i.e. the highest price that
a trader is willing to pay to go long). The bid price is the
same as the highest priced limit order on the buying side of
the so-called order book.
The bid price is the price that is received whenever a trader
places a market sell order (i.e. a market order to go short).
The reason for this is that a market sell order is always filled
at the best available price, and for a sell order, the best
available price is the highest buy order.
Ask Price
The ask price represents the lowest priced sell order that is
currently available for the market (i.e. the lowest price that
a trader is willing to pay to go short). The ask price is the
same as the lowest priced limit order on the selling side of
the order book (the level 2 market data).
The ask price is the price that is received whenever a trader
places a market buy order (i.e. a market order to go long).
The reason for this is that a market buy order is always filled
at the best available price, and for a buy order, the best
available price is the lowest sell order.
Last Price
The last price represents the most recently traded price (i.e.
the price at which the last trade occurred). The last price
will move back and forth between the bid and ask prices as
selling and buying orders are filled. For example, if a trader
places a market buy order, the last price will move to the ask

price, as the market buy order is filled. Conversely, if a

trader places a market sell order, the last price will move to
the bid price.
[Source: daytrading.about.com]

They are responsible for maintaining order in the market for

a stock and posting the best buy and sell orders first. Market
orders are orders to buy or sell a contract at the current
best price, whatever that price may be. In an active market,
market orders will always get filled.
As you can see, a single order covered through the matching
system will cause the price to move and another single order
the opposite way will easily cancel out the effect. If orders
come in on one side faster or in greater quantity (volume
increases), the price will be forced to advance in that
direction. These high volume moves can cause a large
spread in the price. If, however, large volume moves are
nearly matched between one side and the other, the price
spread will be very small. If price is going up and volume is
going up at the close of a bar, then the next bar will continue
up and vise-versa.
In the final analysis, it is not important to know who is doing
what to whom. The important concept to grasp is that there
is a cause which is seen in volume and it has an effect that is
seen in the price spread. Wyckoff goes on with this
conceptual model of his CO in such a way as to not even
think of them as people - just a market mechanism you need
to be "intuitively" aware of. This Market Mechanism is what
we are referring to as Smart Money.
This is why the price spread is so important. As Williams
puts it:

"Volume Spread Analysis seeks to establish the cause of

price movements and from the cause predict the future
direction of prices. The cause is the imbalance between
Supply and Demand in the market which is created by the
activity of professional operators. The effect is either a
bullish or bearish move according to market conditions
prevailing...It is the close study of the reactions of the
specialists and market makers which will give you a direct
access to future market behaviour..."
It is not enough, however, to simply place a large order. The
timing must be right - perfect. Again, the professional trader
will first plan and then launch, with military precision, a
campaign to get their price.

Resistance and Trends

This lesson is on the so-called Support and Resistance and
their relationship to Supply and Demand as seen
inTrends. Why "so-called Support and Resistance"?
In Volume Spread Analysis Trend lines only represent
resistance: either resistance to supply, or resistance to
demand. Remember: Markets move off of the imbalance of
supply and demand. An imbalance with greater supply and
the market has to fall; an imbalance with greater demand
and the market has to rise.
Therefore: an imbalance of Supply is a Down-Trend
where the trend is running under the Supply-Line
Resistance. The market is being Marked Down as Smart
Money Accumulates (buys) more and more of the market's
supply at lower and lower prices.

[Source: StockCharts.com]

The opposite is true of the UP-Trending market: the

trend is running over Demand-Line Resistance as the
market is being Marked UP. SM is Distributing (selling) to
the market's Demand-Line Resistance at higher and higher
prices.

[Source: StockCharts.com]

Trends and Time

Moving on with studying the market background through
VSA comes Trading Ranges, Trend Zones andTrend
Clusters. These have the added value of providing a time

value for measuring market moves. By taking a look at the

background of the market and how it functions within trends
it is possible to foresee future areas of supply and demand
resistance.
Measuring Trends: there are three methods of measuring
trends: Trend lines, which measure the angle, there are
two types of trend lines: the normal use and the reverse use.
Thrusts are used to measure each drive up & drive down.
The third measurement is the Half-Way Point which is an
indication of comparative strength and weakness of the
correction. Wyckoff found this very important and it shows
up in other methods such as fibs, ABC patterns, etc. It is
usually a point at which SM takes a break to reassess the
situation.
Half-Way Points are used as a measurement of relative
strength on a rally or reaction. Unlike other methods which
add additional measures (Pivot Points, Fibs, etc.), the halfway point does have a much better reliability. As an
example: if a stock moves from $50 to $56 the distance of six
points and then reacts, the half-way point would be half of
that six points or at $53. Reverse the process for calculating
the half-way point on a rally following a decline. Example, if
a stock moves down from $30 to $21 a distance of nine
points. The half-way-point would be at half of that distance
and is $4 points added to $21 gives a half-way-point of
$25 . Do not expect to go to the exact half-way point. The
move must only come within the vicinity of an area of supply
and demand resistance.
Trend Range and Zones
This is like Bolinger Bands or Stochastics on steroids. The

bottom trend line is the support line and the top line as the
supply line. In the bottom Trend Zone SM
finds strength developing as Resistance to Supplyand the
opposite for the upper zone - weakness developing
as Resistance to Demand.
In the chart below it can be seen how Tom Williams (TW)
divides a Trend Range into upper quarter and lower
quarter - the battleground. It is in these resistance Zones
where potential breakouts or reversals are most likely to
occur.
While the market moves towards a trend line it is in
the Path of Least Resistance. When it penetrates a Zone
special conditions come into play. If the market is heading
up within the Trend Range it will requireEfort to push
through as will be seen in higher volume: it will take
professional activity, money and effort to change this trend
or no effort to reverse. The exact opposite works for invasion
into the lower Trend Zone. If their is to be a breakout it can
often come as a Gap.
Efort versus Result
A wide spread upbar on an increase in volume,
punching up and through a trend line, while the next
day/bar is level or even higher. You are now expecting
higher prices. On any low volume down day/bar will
confirm this view. DownBars on low volume, especially
on narrow spreads shows that there is little selling
pressure on the market, confirming that the market is
a strong one. However, if the following bars are seen
to be up on low volume, narrow spreads, even closing
in the middle or low then the market is a weak one.

There is no efort to go up. [TW]

Trend Clusters
TW's Trend Clusters are the creation of an automatic trend
line system for the VSA5 computer program he developed
(later to become TradeGuider), that automatically draws
trend clusters on his charts. Technically, these are not
trendlines but what is commonly referred to as Support
and Resistance lines showing where price reacted in the
past either by consolidating for a period or bouncing.
I don't have the platform so the usual s/r lines will have to
do. But, TW's approach to Trend Clusters can still, IMO,
power up these areas. As he puts it:
"As you will see, professional traders want to test or to cross
resistance with the least effort to them. To cross resistance
will cost the marketmaker money which they would like to
avoid. Note how the highs and lows may be testing the
resistance, but the closing price tends to avoid the clusters.
To penetrate old resistance there might be a sudden wide
spread down on high volume, punching through, or a gap
down [this is like jumping the hedge]. You may see a drift
sideways, then amble through the zone, or a snap move
down through a gap. Why this should happen is always open
to discussion. The professionals in the markets are aware of
resistance levels, not through some complex theoretical
analysis, but because they have the orders on their books
and they can see both sides of the market as the orders from
around the world arrive. They will also see when it becomes
difficult to attract business at certain prices [no demand].

What we can be sure of is that resistance to price movement

is a reality whether upwards or downwards."
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The Beginning of a Down Trend

Markets do not like very high volume on up bars because
something big is happening. Either you have seen a Buying
Climax which will mark the end of a rising market. Or
professional money is prepared to buy stock from old locked
in traders from the last previous high. This is not charity
work by the money men but absorption because they are still
bullish and are anticipating even higher prices.
The Beginning of an UpTrend
To create a major up trend you need to see the extremes of
this process at work. This is known as a Selling Climax and
will mark the low point of the trend. The Selling Climax
phenomenon occurs when there has been a major transfer of

stock from weak holders, that is -traders, who have been

locked-in at higher prices suffering the fear and pressure of
losses which cannot be tolerated any longer, decide to sell.
[TW]

Accumulation and Distribution: Part 1

This lesson and the next will breakdown two of Wyckoff's
Market Phases, Accumulation and Distribution, into their
own phases. Different aspects of these phases will be further
broken down in later lessons. In general, these phases show
the "foot prints" of SM. This is the basic layout of the
Campaigns SM uses to make porfits. In practice their will be
some slight differences especially with the number of Tests,
Traps and Shakeouts. And, in some markets, the Line of
Least Resistance might be so easily exposed that tests,
traps and shakeouts are not even necessary for SM to start
taking profits, while other markets with need several.
Take special notice of the very important relationship developing between volume and price spread.

Wyckof Phases of Accumulation

It is possible that phase A will not include a dramatic
expansion in spread and volume. However, it is better if it
does, because the more dramatic selling will clear out more
of the sellers and pave the way for a more pronounced and
sustained markup.
Where a Trading Range (TR) represents a reaccumulation (a
TR within a continuing up-move), you will not have evidence
of PS, SC, and ST. Instead, phase A will look more like phase
A of the basic Wyckoff distribution schematic. Nonetheless,
phase A still represents the area where the stopping of the

previous trend occurs. Trading range phases B through E

generally unfold in the same manner as within an initial base
area of accumulation.

Phase B The function of phase B is to build a cause in

preparation for the next effect. In phase B, supply and
demand are for the most part in equilibrium and there is no
decisive trend. Although clues to the future course of the
market are usually more mixed and elusive, some useful
generalizations can be made.
In the early stages of phase B, the price swings tend to be
rather wide, and volume is usually greater and more erratic.
As the TR unfolds, supply becomes weaker and demand
stronger as professionals are absorbing supply. The closer
you get to the end or to leaving the TR, the more volume
tends to diminish. Support and resistance lines usually
contain the price action in phase B and will help define the
testing process that is to come in phase C. The penetrations
or lack of penetrations of the TR enable us to judge the
quantity and quality of supply and demand.

Phase C In phase C, the stock goes through testing. It is

during this testing phase that the smart money operators
ascertain whether the stock is ready to enter the markup
phase. The stock may begin to come out of the TR on the
upside with higher tops and bottoms or it may go through a
downside spring or shakeout by first breaking previous
supports before the upward climb begins. This latter test is
preferred by traders because it does a better job of cleaning
out the remaining supply of weak holders and creates a false
impression as to the direction of the ultimate move.

A spring is a price move below the support level of a trading

range that quickly reverses and moves back into the range.
It is an example of a bear trap because the drop below
support appears to signal resumption of the downtrend. In
reality, though, the drop marks the end of the downtrend,
thus trapping the late sellers, or bears. The extent of supply,
or the strength of the sellers, can be judged by the depth of
the price move to new lows and the relative level of volume
in that penetration.
Until this testing process, you cannot be sure the TR is
accumulation and hence you must wait to take a position
until there is sufficient evidence that markup is about to
begin. If we have waited and followed the unfolding TR
closely, we have arrived at the point where we can be quite
confident of the probable upward move. With supply
apparently exhausted and our danger point pinpointed, our
likelihood of success is good and our reward/risk ratio
favorable.

Phase D If we are correct in our analysis and our timing,

what should follow now is the consistent dominance of
demand over supply as evidenced by a pattern of advances
(SOSs) on widening price spreads and increasing volume,
and reactions (LPSs) on smaller spreads and diminishing
volumes. If this pattern does not occur, then we are advised
not to add to our position but to look to close out our
original position and remain on the sidelines until we have
more conclusive evidence that the markup is beginning. If
the markup of your stock progresses as described to this
point, then youll have additional opportunities to add to
your position.

Your aim here must be to initiate a position or add to your

position as the stock or commodity is about to leave the TR.
At this point, the force of accumulation has built a good
potential as measured by the Wyckoff point-and-figure
method.
In phase D, the markup phase blossoms as professionals
begin to move into the stock. It is here that our best
opportunities to add to our position exist, just as the stock
leaves the TR.

Wyckof Schematics of Accumulation

PS preliminary support, where substantial buying
begins to provide pronounced support after a prolonged
down-move. Volume and spread widen and provide a signal
that the down-move may be approaching its end.
SC selling climax, the point at which widening spread
and selling pressure usually climaxes and heavy or panicky
selling by the public is being absorbed by larger professional
interests at prices near a bottom.

AR automatic rally, where selling pressure has been

pretty much exhausted. A wave of buying can now easily
push up prices, which is further fueled by short covering.
The high or this rally will help define the top of the trading
range.
ST secondary test, revisiting the area of the selling
climax to test the supply/demand balance at these price
levels. If a bottom is to be confirmed, significant supply
should not resurface, and volume and price spread should be
significantly diminished as the market approaches support in
the area of the SC.
The Creek is a wavy line of resistance drawn loosely across
rally peaks within the trading range. There are, of course,
minor lines of resistance and more significant ones that will
have to be crossed before the markets journey can continue
onward and upward.
Jump the Creek the point at which price jumps through
the resistance line; a good sign if done on increasing spread
and volume.
SOS sign of strength, an advance on increasing spread
and volume.
LPS last point of support, the ending point of a reaction
or pullback at which support was met. Backing up to an LPS
means a pullback to support that was formerly resistance,
on diminished spread and volume after an SOS. This is a
good place to initiate long positions or to add to profitable
ones.
Springs or Shakeouts (covered in detail in later lessons)

usually occur late within the trading range and allow the
market and its dominant players to make a definitive test of
available supply before a markup campaign will unfold. If
the amount of supply that surfaces on a break of support is
very light (low volume), it will be an indication that the way
is clear for a sustained advance. Heavy supply here will
usually mean a renewed decline. Moderate volume here may
mean more testing of support and a time to proceed with
caution. The spring or shakeout also serves the purpose of
providing dominant interests with additional supply from
weak holders at low prices.
A series of SOSs and LPS provides good evidence that a
bottom is in place and price markup has begun.
(Source: findarticles.com)

Accumulation and Distribution: Part 2

In this lesson you will learn the particular details of
the Distribution Phase. There are some concepts that will
be touched on breifly, but they will be covered in detail in
later lessons. These phases are essential to understanding
the future movement of the market. When they are
understood in general, then the specific tactics used to move
the market will nearly perfect the timing of those moves.
Then using VSA as the final analysis will give you the exact
timing for entries and exits.

Wyckof Phases of Distribution

Phase A In Phase A, demand has been dominant and the

first significant evidence of demand becoming exhausted
comes at preliminary supply (PSY) and at the buying climax
(BC). It often occurs in wide price spread and at climactic
volume. This is usually followed by an automatic reaction
(AR) and then a secondary test (ST) of the BC, usually upon
diminished volume. This is essentially the inverse of phase A
in accumulation.
As with accumulation, phase A in distribution price may also
end without climactic action; the only evidence of exhaustion
of demand is diminishing spread and volume. Where
redistribution is concerned (a trading range within a larger
continuing down-move), you will see the stopping of a downmove with or without climactic action in phase A. However,
in the remainder of the trading range (TR) for redistribution,
the guiding principles and analysis within phases B through
E will be the same as within a TR of a distribution market
top.

Phase B The building of the cause takes place during

phase B. The points to be made here about phase B are the
same as those made for phase B within accumulation, except
clues may begin to surface here of the supply/demand
balance moving toward supply instead of demand.
Phase C One of the ways phase C reveals itself after the
standoff in phase B is by the sign of weakness (SOW). The
SOW is usually accompanied by significantly increased
spread and volume to the downside that seem to break the
standoff in phase B the SOW may or may not fall through
the ice, but the subsequent rally back to a last point of
supply (LPSY), is usually unconvincing for the bullish case

and likely to be accompanied by less spread and/or volume.

Last point of supply gives you your last opportunity to exit
any remaining longs and your first inviting opportunity to
exit any remaining longs and your first inviting opportunity
to take a short position. An even better place would be on
the rally that tests LPSY, because it may give more evidence
(diminished spread and volume) and/or a more tightly
defined danger point.
An upthrust is the opposite of a spring. It is a price move
above the resistance level of a trading range that quickly
reverses itself and moves back into the trading range. An
upthrust is a bull trap it appears to signal a start of an
uptrend but in reality marks the end of the up-move. The
magnitude of the upthrust can be determined by the extent
of the price move to new highs and the relative level of
volume in that movement.
Phase C may also reveal itself by a pronounced move
upward, breaking through the highs of the trading range.
This is shown as an upthrust after distribution (UTAD). Like
the terminal shakeout in the accumulation schematic, this
gives a false impression of the direction of the market and
allows further distribution at high prices to new buyers. It
also results in weak holders of short positions surrendering
their positions to stronger players just before the downmove begins. Should the move to new high ground be on
increasing volume and relative narrowing spread, and price
returns to the average level of closes of the TR, this would
indicate lack of solid demand and confirm that the breakout
to the upside did not indicate a TR of accumulation, but
rather a formation of distribution.

Successful understanding and analysis of a trading range

enables traders to identify special trading opportunities with
potentially very favorable reward/risk parameters. When
analyzing a trading range, we are first seeking to uncover
what the law of supply and demand is revealing to us.
However, when individual movements, rallies, or reactions
are not revealing with respect to supply and demand, it is
important to remember the law of effort versus result. By
comparing rallies and reactions within the trading range to
each other in terms of price spread, volume, and time,
additional clues may be discovered as to the stocks
strength, position, and probable future course.
It will also be useful to employ the law of cause and effect.
Within the dynamics of a trading range, the force of
accumulation or distribution gives us the cause and the
potential opportunity for substantial trading profits. The
trading range will also give us the ability, with the use of
point-and-figure charts, to project the extent of the eventual
move out of the trading range and will help us determine if
those trading opportunities favorably meet or exceed our
reward/risk parameters.
Phase D Phase D arrives and reveals itself after the tests
in phase C show us the last gasps or the last hurrah of
demand. In phase D, the evidence of supply becoming
dominant increases either with a break through the ice or
with a further SOW into the trading range after an upthrust.
In phase D, you are also given more evidence of the probable
direction of the market and the opportunity to take your first
or additional short positions. Your best opportunities are at
rallies representing LPSYs before a markdown cycle begins.
Your legging in of the set of positions taken within phases C

and D represents a calculated approach to protect capital

and maximize profit. It is important that additional short
positions be added or pyramided only if your initial positions
are in profit.

Phase E Phase E depicts the unfolding of the downtrend;

the stock or commodity leaves the trading range and supply
is in control. Rallies are usually feeble.
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Wyckof Schematics of Distribution

PSY preliminary supply, where substantial selling
begins to provide pronounced resistance after an up-move.
Volume and spread widen and provide a signal that the upmove may be approaching its end.
BC buying climax, the point at which widening spread
and the force of buying reaches a climax, and heavy or

urgent buying by the public is being filled by larger

professional interests at prices near a top.
AR automatic reaction. With buying pretty much
exhausted and heavy supply continuing, an AR follows the
BC. The low of this sell-off will help define the botom of the
trading range (TR).
ST secondary test, revisiting the area of the buying
climax to test the demand/supply balance at these price
levels. If a top is to be confirmed, supply will outweigh
demand and volume and spread should be diminished as the
market approaches the resistance area of BC.
SOW sign of weakness, which will usually occur on
increased spread and volume. Supply is showing dominance.
Our first fall on the ice holds and we get up try to forge
ahead.
The Ice a wavy line of support drawn loosely under
reaction lows of the TR. A break through the ice will likely
be followed by attempts to get back above it. A failure to get
back above firm support may mean a drowning for the
market.
LPSY last point of supply. After testing the ice (support)
on a SOW, a feeble rally attempt on narrow spread shows us
the difficulty the market is having in making a further rise.
Volume may be light or heavy, showing weak demand or
substantial supply. At LPSYs the last waves of distribution
are being unloaded before markdown is to begin. LPSYs are
good places to initiate a short position or to add to already
profitable ones.

UTAD upthrust after distribution. Similar to the spring

and terminal shakeout in the trading range of accumulation,
a UTAD may occur in a TR of distribution. It is a more
definitive test of new demand after a breakout above the
resistance line of the TR, and usually occurs in the latter
stages of the TR. If this breakout occurs on light volume
with no follow-through, or on heavy volume with a
breakdown back into the center of the trading range, then
this is more evidence that the TR was distribution, not
accumulation. This UTAD usually results in weak holders of
short positions giving them up to more dominant interests,
and also in more distribution to new, less-informed buyers
before a significant decline ensues.

"According to Wyckoff, who was a contemporary of Charles

Dow and Richard Schabacker, technical analysis is not
merely the use of timing tools to monitor for a directional
bias, specific trends or trading setup. For him, technical
analysis can ascertain if trading is recommendable. It can
also help reduce risk through the timing of the trade
location nearest to initial support or resistance levels. The
Wyckoff sequence is composed of six main price and
volume patterns that were determined through Wyckoff's
analysis of individual bar charts and market action in
relation to volume."

Strength vs Weakness
In this lesson you will learn how to evaluate the Strength or
Weakness in a market. It is not enough for SM to simply
place a large order. The timing must be right - perfect. They
will first plan and then launch, with military precision, a
campaign to get their price. Who do they get their price

from? The herd. So this "campaign" is psychological in

nature. Look how Tom Williams politely describes a bull and
bear market:
"A Bull Market occurs when there has been a substantial
transfer of stock from Weak Holders to Strong Holders,
generally, at a loss to Weak Holders.
Strong Holders are usually those traders who have not
allowed themselves to be caught in a poor trading position.
They are happy with their position, they are not shaken out
on sudden down moves or sucked into the market at or near
the tops. Strong holders
are basically strong because they are trading on the right
side of the market. Their capital base is usually large and
they can read the market and know how to trade it. Strong
holders take losses frequently but the losses are low
because they close out any
poor trade fast and take account of these losses along with
other trades which are generally much more profitable.
"A Bear Market occurs when there has been a substantial
transfer of stock from Strong Holders to Weak Holders,
generally at a profit to the Strong Holders."
Most traders new to the market very easily become Weak
Holders. They cannot really accept losses as most of their
capital is rapidly disappearing. They are on a learning curve.
Weak holders are those traders that have allowed
themselves to be 'Iocked-in'
as the market moves against them, and are hoping and
praying that the market will soon move back to their price
level. These traders are liable to be shaken out on any
sudden moves on bad news. These traders have created

poor trading positions for themselves, and are immediately

under pressure if the market turns against them.
According to Williams: "There are two main principles at
work in the stock market which causes a market to turn.
Both these principles will arrive in varying intensities
producing larger or smaller moves."
Principle One
The herd will panic after substantial falls and start to sell
usually on bad news.
"Are the trading syndicates and market makers prepared to
absorb the panic selling at these price levels? (must be on
aDownBar). If they are, then this is a strong sign of
strength."
Principle Two
The herd will at some time after substantial rises as seen in
a bull market become annoyed at missing out on the upmove and will rush in and buy, usually on good news. This
includes traders that already have long positions, and want
more.
"Are the trading syndicates and market makers selling into
this buying? (must be a UpBar) If so, then this is a strong
sign of weakness."
For a market to move up you need buying, you need to see
an increase in volume, not a decrease, but not excessive
volume, where supply may be swamping the demand. If you
observe that the volume is low as the market moves up you

know this has to be a false picture. This low volume is

caused by the professional money refusing to participate in
the up move, usually because they know the market is weak.

Now to use this to expand on the lesson about Resistance

and Trends:
Sign Of Strength (SoS): is an action which shows
that Demand is in control. The SoS should have good
Demand on the Up Move, a Wide Sread and Increasing
Volume on the Upside. A SoS is usually is preceded by a TR
and a stock can continue in a TR until it either has a SoW or
a SoS. The SoS shows that Demand is in control: the VSA
characteristics are that it has a Widening Spread and an
Increase in Volume as evidence of good Demand.

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Sign Of Weakness (SoW): is an action which shows

that Supply is in control. The reaction will decline with a
widening spread, increased price weakness and increased
volume as evidence of increased, heavy selling. The SoW is
also usually proceeded by a TR.

The Beginning of a Down Trend

Markets do not like very high volume on up bars because
something big is happening. Either you have seen a Buying
Climaxwhich will mark the end of a rising market. Or
professional money is prepared to buy stock from old locked
in traders from the previous high. This is not charity work
by the money men but absorption because they are still
bullish and are anticipating even higher prices. [TW]

End of a Rising Market

An UpDay, on high volume, with a narrow spread, into new
high ground.
A Buying Climax in an individual stock is usually easy to
recognise. The stock has already been in a bull move, but
suddenly the price starts to rocket up. The news is good, in
fact very good. The Herd gets excited on all this activity and
starts buying.
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Finding Strength in a DownTrend

One of the most powerful ways to find indicators of strength
is testing for Supply. They do this to see if there is still any

supply left. They do this by quickly lowering the price if

the price closes near the top and has low volume it indicates
that there is no supply. Another big sign of weakness is
an Absorption Volume Bar. It indicates that the downtrend
will soon stop and either reverse or range.
The Beginning of an UpTrend
The Beginning of an UpTrend starts before the down
trend ends. It is the last phase of the down trend the herd
has liquidated their long positions and possibly are taking
short positions. The major move to change the trend will
come when SM unloads most of their holdings.

Climactic Action
The business of accumulating a stock is like any other
campaign. It requires planning,
good judgement, effort, concentration, trading skill and
money to buy stock in very
large amounts without putting the price up against your own
buying. [Tom Williams (TW)]
The terms "bear" and "bull" are thought to derive from the
way in which each animal attacks its opponents. That is, a
bull will thrust its horns up into the air, while a bear will
swipe down.
[Source: Investopedia]
Nailing market tops and bottoms is impossible, but there are
signs that increase the probabilities during relatively shorter
timeframes or trends. Add to that the ability to
recognize Tests and Traps SM uses toShakeOut resistance
(detailed in later lessons) and the SM Campagn lights up.

Notice that single bars are evaluated as clues, multiple bars

reveal tactics, but the campaign comes in waves of
accumulation and distribution based on the levels of supply
and demand. During these waves are the phases of Mark Up
or Mark Down which tend to run as Trends.
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Trends
A market moves up not necessarily because there is more
buying than selling going on, but that there is no substantial
bouts of selling [profit taking] to stop the up move. Major
buying [demand] has already taken place at a lower price
level during the accumulation phase, until substantial
selling starts to take place [appears as excessive volume on
up bars] the trend of the market will still be up. A bear
market takes place not because there is necessarily more

selling than buying as the market falls day after day, but
because there is insufficient buying [support] from the major
players to stop the down move. Selling has already taken
place during the distribution phase at a higher price level
and until you see buying coming into the market [excessive
volume on down bars], the market will remain bearish.
There is little or no support in a bear market [buying] so
prices fall. Herein lies the reason markets fall much faster
than they rise... [TW]
Climax: the peak, the extreme or the end of something and
as the point of highest dramatic tension or a major turning
point in the action. Some synonyms are: top, pinnacle,
height, maximum, consummation, culmination or turn of the
tide. What does a climax do? A climax stops a trend either
temporarily or permanently depending on the subsequent
action. A climax is preceded by some sort of a trend.
Climactic action is hall-marked by wide spreads up on very
high volume, but the price does not respond upwards. A
good trader will now be looking to short the market or sell
calls on any low volume up-move (no demand). [TW]
There are two tactics that are used when a Trend is about to
reverse: the Selling Climax and Buying Climax.
An important point here is to know the tactics
of Retracements versus Reversals. Retracements have: a
lack of volatility; small Spreads; and decreased
Volume. Reversals, on the otherhand, have: increased
Volatility; large spreads; increasing volume. To see this on a
chart simply draw arrows for the stock movement and the
volume. In retracements the arrows are in the same
direction; in reversals the arrows will be in opposite

directions.
The Buying Climax
There are two types of buying climactic action seen in the
indices with only one major distinction. After a substantial
bull move has already taken place, the market moves even
higher on wide spreads up. Good news, excitement, elation
abounding. You observe the volume is Ultra-high. This
indicates that you may have seen a buying climax. [TW]
If the volume is seen to be exceptionally high, accompanied
by narrow spreads into new high ground, you can be assured
that this is a buying climax. It is called a buying climax
because to create this phenomenon there has to be a huge
demand for buying from the public, fund managers, banks
and so on. It is into this buying frenzy, that syndicate traders
and market-makers will dump their holdings, to such an
extent that higher prices are now impossible. In the last
phase of the buying climax, the market will be seen to close
in the middle or high of the bar.
Those traders that have been waiting to buy start buying afraid they will miss out on a bigger move up. Even traders
that already have positions, buy more. This gives the SM a
chance to unload huge amounts of their holdings in this
stock, bought at lower levels, without moving the price down
against their own selling. After this Buying Climax they sell
the stock short, knowing that there is no support or demand
at these high prices. This process guarantees huge profits.
The Buying Climax (BC) is the climax ending an uptrend.
The buying gradually builds up & builds up and finally
comes in with a rush until it exhausts itself on the BC. The

BC has increased volume and a widening spread as it moves

up. Following a BC one of two things can occur, either
a Automatic Rally (AR) or a lateral move. This in turn is
followed by one of two things: either a continuation of the
uptrend or aSecondary Test (ST). If the supply is to weak to
drive the stock down or demand to strong to allow it to go
down instead of having the AR the stock will have the lateral
move. Usually however, it will have some form of an AR.
That AR may have increased volume, heavy volume or no
volume. It may have wide price spread, or relatively narrow
price spread.
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The Selling Climax

The news will definitely be 'bad' This, together with the pain

of previous falls will panic the herd into selling. This will
give SM the opportunity to place substantial amounts of
money into the market at bargain prices. Ultra wide spreads
down, with exceptionally high volume, usually closing on or
near the highs of the day. If the price action does not close
on the highs but on the lows and the next day is up closing
on the high, this can be regarded as similar action. Add
more bullishness if the news is really bad. [TW]
The classic characteristics of a selling climax:
Abnormally large volume
Wide spreads
An acceleration of the downtrend

In the chart below there is a Test for supply (2nd bar in red
box), then only light volume and a Spring Trap. This was the
go-ahead for the rally to begin.

Back to Wyckoff: "Abnormally large and swift volume

expansion marks a turning point."

The Tests

This lesson details Supply and Demand as seen

through Volume Spread Analysis when SM tests the
market. These tests amount to discovering Supply/Demand
and the "footprints" of SM through Tom Williams' (TW) Low
Volume Rule. This is all taken out-of-context of the
background (trends, timeframes, s/r, etc.) which was the
subject of earlier lessons.
Understanding and Recognizing the Market Forces of
Supply and Demand
Markets move off of the imbalance of supply and demand.
This is what VSA identifies so clearly on a chart: An
imbalance of supply and the market has to fall; an imbalance
of demand and the market has to rise.
Here it's turned around to see how the market moves on No
Demand or No Supply. There are two Low-Volume
Tests SM uses before turning a market that are somewhat
easy to spot.
The first test here illustrates weakness before a bearish
move, that is, weakness in an uptrend ("weakness appears
on up bars" TW).
No Demand Bar: a narrow spread UpBar with low volume
that Closes in the lower half of the price-bar.
The No Demand Bar shows there is very little activity from
the SM. It is this "no demand" from SM that causes a market
to reverse on the tops. The low volume shows that their
participation is limited in the up move because they know
the market is weak. Their campaign will include giving the
move an extra nudge to clear any stops. In the end,

triggering stops is a very profitable manouver for them. This

is one of the times they will trade away from the true value
of the market to cause confusion - then panic - when the
market turns.
Those traders who were anticipating the top and took short
positions with stops in that area are forced to cover away
from the true value then get them back at a lower price. At
this time, the news is talking up the bull market day - if the
reporters haven't done it on their own, there is always an
analyst (manipulating SM) calling in.

The No Supply Bar is another narrow spread downbar with

low volume that closes in the lower half. It is used to find
strength in a downtrend ("strength appears on down bars?"
TW). Here we're looking to establish the cause of certain
price movements. The cause is quite simply the imbalance

between supply and demand in the market, which is created

by the activity of SM or volume. The effect is a change in
price. Volume is the SM indicator. These low volume bars
indicate SM is mostly inactive, watching their tests for
strength or weakness to unfold.
This is the opposite of what retail traders asume. The Edge
for SM is their confidence and deep pockets. They can risk a
large amount of money during their campaigns to rake in
huge gains during the Mark-Up or Mark-Down phase.
Before SM can start an uptrend they must remove supply
from the market - accumulate. The supply they have
accumulated is intended to be distributed at higher and
higher prices during the Mark Up Phase. If they start the
Mark Up Phase before supply has been removed, it could
cost them substantially (in time and money) when hidden or
unforeseen supply shows up. They might also lose their edge
for creating panic in the retail sector - in this case greed: the
fear of losing out during the up move. The No Supply Bar
test is an essential tactic in SM's campaign to turn the trend
up.

Tom Williams' Exception to the Low Volume Rule

They say that it is the exception that proves the rule, and
there is an exception to this one. This is one reason rigid
mathematical rules run into trouble. The market is dynamic,
showing the action of human traders, but it still shows logic.
Once the logic is recognised the confusion disappears.
If there is a low volume up day on the very first day of any
break-out from a genuine accumulation area, the result is

often a rapid one day up move from the accumulation area

on low volume. This is NOT a sign of weakness. The wide
spread up and out on the first day from a genuine
accumulation area on low volume is caused bya shortage of
stock. In accumulating stock, as we saw earlier, the trading
syndicates would have removed most of the supply that is
available at those price levels. This low volume up move out
of an accumulation area is therefore an indication of
strength. The difference is that you will have a buying phase
during the previous few days or bars, not signs of weakness.
Most up moves on low volume are a sign of weakness.
However, try to recognize the reasons. Genuine no demand,
or low volume up-day/bar, always has market weakness in
the background which the professional money has seen.
More from Tom Wiliams and becoming a Predator
Admittedly easy to identify in hindsight bar by bar. The
important point is to keep in mind is that all the indications
of weakness must have been there in the first place, as the
market was unfolding day by day. You will no doubt have
difficulties in analysing a chart as it unfolds bar by bar until
you have trained your mind to think like a predator rather
than run and act with the Herd. Practically all these up bars
on this chart will be accompanied with 'good news' of some
sort. If there is no good news available the news media will
simply make it up to explain away the sudden up move taken
place on any particular day. Your subconscious mind will be
busy absorbing this information whether you like it or not
and forming an opinion. To the untrained mind that view will
be bullish, therefore you will not have even noticed volume
implications telling you otherwise.

Traps and Shakeouts

This lesson illustrates the most powerful tactics SM uses to

manipulate the herd. A Trap sucks a trader into a position
and locks them in. Lock-In is the psychological state of mind
which exists when an individual believes that he cannot
afford to liquidate a position. A Shakeout forces traders out
of positions they are holding. This is often a single move that
accomplishes both purposes: either an Upthrust or Spring.
These are not always used during Breakouts or Reversals.
Sometimes SM finds it unnecessary for the a market and
won't expend the extra effort and funds required. But if
these tactics are used, they are very easily recognized and
powerful indications of a big move coming.
The UpThrust Trap
The first Trap illustrated comes during a Re-Distribution in
the Mark-Down Phase in a downtrend. SM has accumulated
more Supply and is ready to sell. The chart below shows
the UpThrust Trap (aka: Bull Trap). This is a wide spread
UpBar with an increase in volume, punching up through a
trend line.

[Source: YourTradingCoach.com]

Price has rallied into the Supply-Line Resistance. SM begins

the UpThrust Trap and quickly buys on higher volume
causing a Spike in the price spread. The Herd jumps in at
the higher price level. Then, just as quickly, SM sells. The
Herd is trapped. The smarter ones will sell while the price is
falling, thereby, cutting their losses short; the dumber ones
will hold longer hoping for a miracle reversal to save them
from their rapidly growing losses.

[Source: YourTradingCoach.com]

The above chart shows the Spring Trap (aka: Bear Trap) as
the reverse of the UpThrust Trap, though less volume was
needed for SM to acheive their goal. The herd's short sell
triggers are hit and they panic as price turns against them.
As can be seen in the blue boxes, this is not the first time
these suckers have fallen for this setup, nor the last! These
are head-fakes (aka: False Breakouts) by SM and, as can be
seen, easily readable in a chart when the setup is
understood.
The Reverse UpThrust [or Professional Support]
This action is very similar to a Selling Climax but on a far
lesser scale - a mini Selling Climax. You still have a wide
spread down day, often driving down into recent or new low
ground, then closing at or near the highs on high volume.
Add more bullishness if the news is bad. Any down day on
low volume [no selling] after this event, especially if it closes
in the middle or high of the day. This is a strong indication of

market strength because supply that was there previously

has now disappeared. This SM buying [absorption of the
supply] will usually stop the down move. The more liquid the
market, the more buying they will need to stop the down
move. The four major currencies are good examples of liquid
markets. Here substantial volume is usually required over
several days to stop a down move.
=====================================
======
Shakeout: A deliberately forced price reaction, whose
purpose is that of stimulating public selling in order to
facilitate the Accumulation of speculative positions.
Terminal Shakeout: vs Ordinary Shakeout (OS): the
DIFFERENCE between the Terminal Shakeout and a
ordinary Shakeout is that the ordinary Shakeout occurs in
an UPWARD trend. The Terminal Shakeout occurs at the
END of the ACCUMULATION area and at the END of a
TRADING RANGE or a SUPPORT AREA. While the ordinary
Shakeout occurs in an UPWARD trend. An ordinary
Shakeout maybe defined as a sharp DOWNWARD THRUST
occurring in an UPWARD TREND without extensive previous
preparation. It is executed for the purpose of buying all the
stock possible from WEAK or VULNERABLE holders, it is
PRECEDED By an UPWARD move. The ordinary Shakeout is
characterized by PRICE WEAKNESS and usually an
INCREASED VOLUME. In other words a WIDE SPREAD and
some INCREASE in VOLUME. However, the VOLUME maybe
HIGH, MEDIUM or LOW. When there is SUPPLY on the
Shakeout itself it must be tested by a SECONDARY TEST.
The secondary test should have a NARROW SPREAD and a
DECREASED VOLUME compared to that of the ORDINARY
SHAKEOUT. This indicates that there was less SUPPLY on

the secondary test then there was on the Shakeout and the
buyers then KNOW that the stock is AGAIN prepared to
MOVE UP with relative SAFETY.
[Source: stockmarket-operator.com]

Because of the huge volume of trading it will take

professional buying or selling to make a difference large
enough for us to read the variations in the price spread and
the volume with confidence. This fact alone tells us that
there are professionals working in all the markets. These
traders by their very nature will have little interest in your
financial well-being. In fact they are predators looking to
catch your stops and mislead you into a poor trade given the
slightest opportunity. The continuous price quotes
throughout the trading day will show a high, low, close and
volume for the time frame you are using (tick volume is
generated if real volume is withheld). You now have the

information to determine the true balance of supply and

demand.
This skill will take you up to a new and exciting level of
expertise. [TW]
=====================================
=======
The Spring
A Spring is Williams' refinement of Wyckoffs concept of
a Terminal Shake-Out. A Spring is a penetration below a
previous support area which enables you to judge the quality
and quantity of supply on that penetration. The critical thing
that is shown by the Spring is the amount of Supply that
comes out on the drive to new low ground and how well that
Supply is absorbed.
Without accumulation every rally is doomed to failure.
Without distribution every down move is also doomed to
failure. Every move is directly linked to the amount of
shares that have changed hands, which creates an
imbalance of supply and demand, tipping the move one way
or another. [TW]
A definitive case of Efort getting Results.

The Creek
Wyckoff was always dissecting and drawing meaning from
volume strengths and weaknesses. He was also focusing on
price retracements relating to volume surge. This lesson will
illustrate, in a creative way, how SM overcomes Support
and Resistance. Areas of Resistance (Demand) are

represented as a Creek and areas of Support [Supply]

are Ice.
Jumping the Creek as defined by Wyckoff refers to a
particular price pattern hugging a steady line of resistance,
the Creek, and then suddenly exploding beyond it - a
breakout.

This breakout if followed by retracement of lighter

volume,the price will hug back to support or resistance.
Usually on the way back to the Creek, the price will not
break through the Creek and should turn around and head
up. Wyckoff referred to this retracement as coming back to
Ice. He called it Ice because the line which was originally
the Creek has become impermeable. The Ice is the former
support area at the bottom of the TR which then becomes a
Supply area.
Backing up to the edge of the Creek is normally a potential
SoS. After jumping the Creek the backup to the edge is
usually the reaction to the Rally of the Jumping of the Creek
and comes to rest on support above the Creek.
Cross or Jump the Creek (JAC): either minor/major. To jump

(rally) above the Creek (drawn trendline) or flow of supply.

This jump or crossing is a Sign Of Strength (SoS). Now
where is the Creek? After much searching for the answer to
this question Mr. Evens finally reached the conclusion that
the CREEK is WHERE the BOY JUMPED. Applying this to
the market, the CREEK is WHERE the VOLUME CAME IN,
where the EFFORT the PUSH the POWER came in. It is
important to recognize that there is no one exact way of
drawing these creeks. Do some experimenting with them,
you may wish to draw the Creek lightly in pencil on your
chart and continue the Creek as long as it is useful, then
later, either erase the Creek, or a branch of the Creek, or
perhaps remove it from your chart altogether. However,
leave the important creeks on your chart as they can be
EXTREMELY HELPFUL in drawing your attention to the
MEETING of supply in a T/R and in assisting in defining the
probable extent of the reaction, that is the BACK UP, which
is likely to occur after a possible crossing of the Creek. It
will be especially helpful in drawing your attention to
situations where a stock falls back into the edge of the
Creek, because every so often it does that and every so often
that little old boy scout sort of drowns. Our problem is NOT
to drown with him. [Wyckoff]

When the price of an issue leaves a trading range to the

down side, there will frequently be what Wyckoff refers to as
a fall through the ice. Ice is identified as the zone of support
defined the bottoms of previous reactions in the action. The
fall through the ice occurs when the price trades through
this zone on widening spread and increasing volumes. The
fall trough the ice is not a primary trading opportunity.
However, the rally that follows the fall through the ice can
develop into a primary trading position. This advance is
identified as the rally back to the ice. The purpose of the
rally back is to confirm that the former support provided by
the ice has been converted to resistance. When this
confirmation is in place, the price can resume down side
progress. The rally back that is likely to provide the best
entry point on the short side if it unfolds on narrowing price
spreads to the up side and declining volumes as the price
approaches the zone of former support. Down trends that
develop as the price leaves a trading range consist of a
series of thrusts and corrections. The correction of each
thrust can provide a primary trading position if it is
completed in the vicinity of the halfway point of the previous
thrust to the down side and if it unfolds on declining
volumes.
[Step four of the Wyckoff Method]

==============================
Sign Of Strength (SOS): is an ACTION which shows that
DEMAND is in control. The (SOS) should have GOOD
DEMAND on the UP MOVE, a WIDE SPREAD and
INCREASING VOLUME on the UPSIDE. Now let us deal
briefly with the (SOS). The Sigh of Strength and the
Crossing of the Creek are often two ways of looking at the

SAME ACTION and the BACK UP to the edge of the CREEK

very often is the (LPS) Last Point of Support. This (SOS) is
usually is preceded by a T/R and a stock can continue in a
T/R until it either has a (SOW) or a (SOS). The (SOS) shows
that DEMAND is in CONTROL the Price & Volume
characteristics are that it has WIDENING SPREAD and an
INCREASE in VOLUME evidence of the good DEMAND. This
is PROVEN and followed by the REACTION to the (LPS),
that (LPS) should have a NARROWING of the SPREAD and a
DECREASED of VOLUME compared to the (SOS) indicating
the LACK of SUPPLY on the REACTION

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Sign Of Weakness (SOW): is an action which shows that

SUPPLY is in control. The reaction will decline with a
widening spread, increased price weakness, and increased
volume, evidence of increased and heavy selling, this is
BEARISH. The (SOW) is usually proceeded by a T/R. If the
T/R was in an uptrend it would have been stopped by the
(PSY), (BC), (AR), (ST). The T/R will end, on the far right
hand side, it may end its move with a classic (UT) or (UTAD)
or it may NOT. It may simply have a (SOW) and a (LPSY)
with perhaps lower tops and lower bottoms. Any possible or
potential (SOW) must be confirmed, denied or left in doubt
by the SUBSEQUENT rally. The critical thing is NOT HOW
FAR the stock rallies, the critical thing is HOW it RALLIES.
If it rallies with a gradual decrease in demand, evidenced by
a narrowing spread and decreased volume, and with a lower
top this COMPARATIVE lack of DEMAND would PROVE and
CONFIRM that the previous reaction was a (SOW). Thus DO
NOT take a speculative position until you see an (UT) or an
(UTAD), or where there is no (UT), the first place to take a
position is on the (LPSY) after the (SOW) and aim to
pyramid with the coming trend.
[Source: stockmarket-operator.com]

News Events
In this very important lesson you will learn about
the Triggers SM uses for their high volume moves.
News comes from journalists who could be reporting from a
biased source: a SM manipulative liar or an analyst who is
trying to get the public involved in a scheme to manipulate a
market. Even taking a contrarian view doesn't help because
we don't know exactly what the plan is or the timeframe.

They could be trying to get a push going to add to their

market or simply setting-up the Herd for a quick fleecing.
Market information on futures contracts is public and
available through regularly scheduled company releases and
government reports. Economic reports are issued by the
government and, unlike company announcements, are not
dependent on boardroom meetings, management turnover,
insider information, officer incentives, and personal or
corporate agendas.
Economic Announcements can have a huge impact on the
market; therefore, knowing how to interpret and analyze
them is important for all investors. Some of the most
important economic indicators include: the Beige Book,
Consumer Confidence Index (CCI), Gross Domestic Product
(GDP), Housing Starts, Jobless Claims Report, Non-Farm
Payroll, etc.
"Market Makers base their bids and offers on information
you are not privileged to see. They know of big blocks of buy
or sell orders on their books at particular levels and the
general flow of the market. These wholesalers of stocks also
trade their own accounts. It would be na.ive to think they
are not capable of temporarily marking the market up or
down as the opportunity presents itself, trading in the
futures or options markets at the same time. They can easily
mark the market up or down on good or bad news, or any
other pretence. They are not under the severe trading
pressure this has put on all other traders, because they are
in tune with real picture and in most part it is they that are
doing all the manipulating. This is good news for us because
we can see them doing this in most cases fairly clearly and
can catch a good trade if we are paying attention. Why play

around with the prices? They want to trap as many traders

as possible into poor positions. As an extra bonus for them
this also includes catching stop loss orders."
[Tom Williams (TM)]

Listen to the News by All Means But...

Always say to yourself "BUT " Is the professional element
going to mark the market either up or down on this news, to
better their own trading position? Is the market basically
strong or weak? If the market looks strong, is this apparent
bad news giving you a chance to buy? What is the volume
telling you? Low volume for example on a down day
indicates 'no selling'. High volume on a down day with the

next day level or up; indicates 'buying'. [note both on a down

day]. News can never change the trend of a market. What is
the background history? News can never change the
foundations that any particular move is based on. If the
market has already seen substantial falls, is this bad news
going to finally shake the weak holders out of the market
allowing a market turn and giving a good buying point?
You will always see the specialist and market makers playing
around with the prices on news. This is acceptable as long
as you are expecting them to do this, and not surprised or
taken in when it happens. [TM]

When approaching a major announcement, the risks jump

up. First, is the news going to be interpreted as good or
bad? Then, you have to be fully prepared and in early
because the announcement will probably create such a wide
spread it isn't worth the slippage, and move so fast your
platform won't be able to get you in at a good price
afterwards no matter how fast your trigger finger is. So,
back to basics:
Williams' Principle One

The herd will panic after substantial falls and start to sell
usually on bad news. Then ask yourself:
Are the trading syndicates and market makers prepared to
absorb the panic selling at
these price levels? (must be on a down bar). If they are, then
this is a strong sign of
strength.

Williams' Principle Two

The herd will at some time after substantial rises as seen in
a bull market become annoyed at missing out on the upmove and will rush in and buy, usually on 'good news'. This
includes traders that already have long positions, and want
more. Then ask yourself:
Are the trading syndicates and market makers selling into
this buying? (must be a up-bar) If so, then this is a strong
sign of weakness.
Know where the market is as to Strength and Weakness in
relation to Supply and Demand.

Efort without Result

A major sign of weakness is Effort without Result. There is
an effort to go up (UpBar on the Chart below) which fails check the volume, and is confirmed on the very next bar
(DownBar). After the results on these two bars, SM gets out
- Volume dips. The up move is over.

What does this mean? Probably no news event will be able to

push this market up during these time periods. But SM has a
campaign that is longer term. From the previous
manoeuvers, what would the herd be thinking?
The investment SM makes to get what they want is too high
to allow much risk of failure. They are not in this to
supplement their income. They are in it to brag about how
much they will make this year or to buy a new yacht next
year.
Bottom line: don't base a trade on the news or a coming
announcement, read the chart and understand the campaign
SM is running. If it's going to be big, then look for the
trigger be timed with a news flash or economic
announcement. If you understand the cause that is
developing, you will know what the effect will be when SM
pulls the trigger.

How to analyze Economic Announcements

If you look at a data calendar (see here for a calendar and
here for my essay) you can find out when certain data are
released...The Employment Report essay (here) explains
how the Bureau of Labor Statistics calculates the numbers
that are included in the report; in this essay, we explore the
announcement process, that is how analysts forecast the
data, how the consensus forecast is obtained, what are
whisper numbers, the lock-up and what happens at 8:30
am on the first Friday of the month. For the purposes of this
essay I will use the monthly announcement of the
Employment Report but the same analysis could be applied

to other announcements...
At 8:30 am the data are released and broadcast on the news
wires and television; but before then there are
approximately 20 journalists who have seen the data and
written reports at the lock-up (see here for an excellent
essay describing the lock-up). Accredited journalists from
major news organizations receive the data release a halfhour early and prepare their articles that can be released at
exactly 8:30 (they are locked up in a room where they are
not allowed to contact the outside world before the official
release). The data are usually available to senior
government officials the night before the release so that the
appropriate cabinet secretary can be prepared to speak just
after the release.
Then at 8:30 the data are released to the public; typically
the data are announced on television (CNBC and
elsewhere), via paid data services to their clients, on news
wires and on the web sites of the agencies that release the
data. Traders often react to the initial announcements and
analysis by the reporters in the lock-up before; later analysts
will release comments on what the data really mean through
to their traders, through wire services and in letters to
clients (a service performed by the author of this article).
But an hour later there is another announcement and a
month later a revision and five years after that a benchmark
revision and the data will look very different.
[Read the entire article
at: UnderstandingTheMarket.com http://understandingthem
arket.com/?p=47]

Sometimes, it's pretty simple to scalp a news event in Forex.

On the release, the pair will spike one way or the other - it
doesn't matter if the news is good or bad - then drop back
before it trails off into the actual reaction. Just wait for the
spike to back off then jump in for the ride the other way.
Sometimes, if you are fully prepared, you can see the setup
coming and catch both sides of the spike.

The X-factor
and hence trend reversals come as a surprise to them, as
the past performance doesnt guarantee the future. The
trend reversal during intra-day and for the long term is a

major component to be understood well to be a successful

trader.
The traders at any given buy or sell level, will view the same
level differently depending on the news
or sentiment.The market makers/facilitators/operators use
different strategies, news and rumors, political
developments etc to their advantage to bring in swings
within the market. They create a bullish mood to sell and
bearish mood to buy. They never do hat-tricks. The shift in
trading zone causes confusion and comes as a surprise to
the trader who fails to act smartly and as a result
misunderstands the direction of the market.Keep in mind
that the operators create the market sentiments and act
against the traders from time to time.
Understanding the intention of the operator from time to
time and trade accordingly will give promising results. But
how do we understand when they bring in changes in levels
faster than we think?

Bottom Reversal: Step-by-Step

First: What news is there to effect your Market?
Second: What is the Sector or Index Trend for your Market?
Third: What Phase is your market in?

Fourth: Draw the Trading Range (s/r) lines.

Fifth: Determine the Line of Least Resistance

It is through the Phases of the TR that we can distinguish

Accumulation/re-Accumulation from Distribution/reDistribution.
Trading Ranges are places where the previous move has
been halted and there is relative equilibrium
between Supply and Demand. It is here within the TR that
dominant and better informed interests conduct campaigns
of Accumulation or Distribution in preparation for the
coming move. It is this force of Accumulation or Distribution
that can be said to build a Cause which unfolds in the
subsequent move.
The Beginning of a Down Trend
Markets do not like very high volume on up bars because
something big is happening. Either you have seen a Buying

Climax which will mark the end of a rising market. Or

professional money is prepared to buy stock from old locked
in traders from the last previous high. This is not charity
work by the money men but absorption because they are still
bullish and are anticipating even higher prices. [TW]
A buying climax in an individual stock is usually easy to
recognise. The stock has already been in a bull move, but
suddenly the price starts to rocket up. The news is good, in
fact very good. The Herd gets excited on all this activity and
starts buying.
The Buying Climax
There are two types of buying climactic action seen in the
indices with only one major distinction. After a substantial
bull move has already taken place, the market moves even
higher on wide spreads up. Good news, excitement, elation
abounding. You observe the volume is Ultra-high. This
indicates that you may have seen a buying climax. [TW]
Those traders that have been waiting to buy start buying afraid they will miss out on a bigger move up. Even traders
that already have positions, buy more. This gives the SM a
chance to unload huge amounts of their holdings in this
stock, bought at lower levels, without moving the price down
against their own selling. After this Buying Climax they sell
the stock short, knowing that there is no support or demand
at these high prices. This process guarantees huge profits.
Finding Strength in a DownTrend
One of the most powerful ways to find indicators of strength
is testing for supply. They do this to see if there is still any
supply left. They do this by quickly lowering the priceif the
price closes near the top and has low volume it indicates

that there is no supply. Another big sign of weakness is an

absorption volume bar. It indicates that the downtrend will
soon stop and either reverse or range. Yet another sign of
strength is a reverse upthrust t means the trend will
usually reverse immediately. [VSA Quick Guide]
As can be seen in the chart above at first there is high
volume to stop the trend - SM is over-matching the new
Demand of the late-comers with a high volume of Supply.
The market could move sideways while SM absorbs the
remaining supply and runs tests. When SM is convinced
there is no supply left they will use an UpThrust Trap to
lock-in the Herd. Their judgement is clouded by the rapid
mark-up with its accompanying good news, and the
anticipation of even higher prices.
Phase A: Exhaustion of Supply - Supply has been dominant
but is near exhaustion. The price looks good to SM and they
are preparing to resist further decline (Support) the price
level.
Supply-Line Resistance (Price Support)
An imbalance of Supply is a Down-Trend where the trend is
running under the Supply-Line Resistance. The market is
being Marked Down as SM Accumulates (buys) more and
more of the market's supply at lower and lower prices.
Price has rallied into the Supply-Line Resistance. SM begins
the UPThrust Trap and quickly buys on higher volume
causing a Spike in the price spread. Bulls jump in at the
higher price level. Then, just as quickly, SM sells. The Herd
is trapped. The smarter ones will sell while the price is
falling, thereby, cutting their losses short; the dumber ones

will hold longer hoping for a miracle reversal to save them

from their rapidly growing losses
Market reaches good buying level for SM (Campaign begins)
Selling Climax (SM buys (covers shorts) on bad news): a
sharp DownBar ( DownBar are strength) closing on the low.
The volume is high. The next bar reverses up closing on it's
high, the volume is also high. These two bars are Stopping
Volume and will mark the low for the coming Shakeout.
The Accumulation (of outstanding supply) phase has begun.
The No Supply Bar is another narrow spread DownBar with
low Volume that closes in the lower half. It is used to find
strength in a downtrend ("strength appears on down bars?"
TW). Here we're looking to establish the cause of certain
price movements. The cause is quite simply the imbalance
between supply and demand in the market, which is created
by the activity of SM or volume. The effect is a change in
price. Volume is the SM indicator. These low volume bars
indicate SM is mostly inactive, watching their tests for
strength or weakness to unfold.
The UpThrust Trap (Shakeout): Big Spread through High
of Range closing on low with lower volume.
Volume becomes high, but the bars are closing in the
middle. This is a sure sign that professionals traders are
absorbing the selling from fearful traders.
Spring Trap: Huge Volume, huge spread closing near High.
The Spring Trap (aka: Bear Trap) is the reverse of the

UPThrust Trap, though less volume was needed for SM to

acheive their goal. The herd's short sell triggers are hit and
they panic as price turns against them. These are head-fakes
(aka: False Breakouts) by SM and easily readable in a chart
when the setup is understood.

VOLUME PRICE OR SPREAD ANALYSIS

--------------------------------------------------------------WecanusethisVolumePriceAnalysisVPAorVolumeSpreadAnalysisVSAforAnalysis
theDSEGeneralIndexofDhakaStockExchangepriceaswellasallothervolatile&active
stocksinthemarket.
-----------------------------------------------------------------There will not be any demand for something when there is plenty of it available and
nobody wants it. As the availability decreases and more people want it then the
demand increases. So the first thing the SM does is find something that is available a
plenty and cheap. The next step is to create a scarcity of the same and get people
interested in it which in turn generates the demand. This is first phase which is
Accumulation.

ACCUMULATION
Accumulation is a process through which the SM acquires a large quantity of the
stock at the lowest possible price. Accumulation is a subtle, sophisticated and sly
process of cornering a huge quantity of the stock that makes the following phases
possible and worthwhile. Once a large quantity has been absorbed the number of
floating stock reduces and the demand increases. This makes possible the next phase
Markup.
Accumulation normally takes place in congestion areas. Congestion area are mostly
sideways range bound movements where the stock appears to have no interest to
either move up or move down. The SM ensures that the stock is contained below a
certain upper level which is the supply area. At the same time the SM also supports
the prices above a certain lower line which is the support area. The stock moves
within an upper resistance or supply area and a lower support area.
The congestion areas are characterized by Indecision. One of the most important
characters of congestion areas is the Low Volume. When most traders are bullish or
bearish the volume is high. Low volumes indicate indecision among the traders on
bullishness and bearishness.
Ah.. Sounds easy.. Well the problem is that congestion areas are seen in both
accumulation areas as well as Distribution areas oh , Well that is not the only
problem. There will be periods where no one seems to be interested in the

stock the pattern of price movement most of time very similar to the congestion
pattern..
So the naturally the question is how one would ascertain if the pattern is really
accumulation in progress. A little later on this and other congestion patterns..
So the question was How one checks if the congestion area is really an
accumulation area. There are a few things to lookout for..:
First, the indecision should be quite visible. In other words the volume should be
low and quite. No huge volume upsurges. Even if the volume is relatively higher the
range between up day volumes and down day volume should be narrow.
Second, the spread of the bars (High Low) should be narrow.
Third, the volume should shrink near the support line and expand near the
resistance line.
Fourth, the stock should be trading in a range for some weeks if not months.
Also you may see some shakeouts in the trading range. The SM would temporarily
drive down the prices below the support line in order to takeout the stop losses and
panic the weak hands into selling. You will see the stock bounces back above the
support line immediately. By this process the SM is shaking out the weak money
from the stock. For most of us it is just a failed breakout. Sometime the stock instead
of bouncing back would continue to drop if there was too much supply. So trading
these breakouts could be tricky.
Also it would a good sign if the stocks trading range is much above the support line.
Normally we would see some of the above signs if not all in the accumulation area.
There are many other patterns which signify accumulation. Some of them are
rounding bottoms, reverse head and shoulder and double bottoms (or W) patterns.
Each could be explained in terms of SM activity. However we would go into the
details now. One thing to keep in mind when evaluating patterns is that it is very
important to check the volume pattern as well.
For an example we will look at the chart of HCC where a clear accumulation
indication was seen June 2007:
image: http://1.bp.blogspot.com/wb7nWZ3u3WM/Tlt8R2NZE0I/AAAAAAAAALI/sETHxHfd1m8/s320/VPA-01.png

A few points about the congestion zone we are looking at for signs of accumulation. It
is important to look at the history of the stock prior to the congestion area. A few
things to look out for.
Has the stock gone through a cycle of accumulation, markup, distribution and
markdown previously? Were there signs of a selling climax just prior to the
congestion? If so, the SM are really looking out for making another round.
Or the stock has been languishing aimlessly prior to the congestion zone you are
looking at. If so, this area you are looking at is not accumulation at all.
Was the stock enjoying an uptrend prior to the congestion? If so, this could be a reaccumulation going on here.
Was the stock undergoing a minor down trend (after an up move) prior to the
congestion? Was there a downtrend without selling climax? Then this could mean
there is re-distribution in progress and it may be advisable to look out for sign of
distribution. (If you are wondering what is selling climax.. dont worry.. we will take
it up in detail later.)

MARK UP

Now we come to the next phase in the game plan of SM, namely Mark Up. Once the
smart money has a cornered a huge chunk of the stocks they are ready for the next
move. The idea is to jack up the prices so the SM can fill their pockets. Typically you
will see the low are getting higher. The closes are slowly getting nearer to the high.
The prices are getting higher on lower volumes as there is very less supply. The
reactions happen much higher than the support line.
Then ..the stock shoots through the resistance or supply line with higher volume. For
that matter the stock need not exhibit the characteristics mentioned above. Suddenly
it can just pop out of the congestion zone.
It is better to take note on the volume at this juncture. The volume need not be very
high at all. Since there is no supply (SM have the majority of the floating stock). If the

volume is moderate we should see it coming in strongly soon. Otherwise the move
will collapse and stock would return to the base. We should see a large swift increase
in the volume in case of a genuine breakout. The stock should be closing near the top.
Also too much volume is not good. It would mean too much supply is coming in.
Heavy volume with the stock closing in lower half would definitely mean supply
coming in. Typically an 150% increase in volume with the close near the top would
indicate a successful breakout. The breakout is just the beginning. Then the stock
moves up in stages. Each stage would be an advance at higher volumes and a
retracement at lower volumes. The retracement is mainly due to short term traders
booking their profits. The SM also starts the distribution during the retracement. The
point at which the retracement stops become important. These should be above the
previous retracement stops. In simple terms as Saint would put it the stock is making
higher high pivots and higher low points.
We will also see sideways movement during the up move which would be congestion
areas. We need to pay lot of attention to these congestion areas for this could be final
distribution areas before the mark down begins. Also it pays to give attention to
volume during retracement and congestion areas. Increasing volumes near support
line and low pivots indicate problem. If the increase is dramatic then it is time to reevaluate your position. Finally the stock could make a climax run where the price and
volume explode. The shorts run for cover and the green horns rush in not to be left
out... like cattle rushing into a abattoir. Soon rapid markdown starts leaving the weak
money holding the bag and he SM their cash.
Just enclosing a chart with similar conditions mentioned above:
image: http://3.bp.blogspot.com/-2VMSzLu0Qq0/TltMWaCtXI/AAAAAAAAALM/0Mh0TT5KinI/s320/VPA-02.png

Please do note that here we are talking about more of an idealistic picture. In reality
it could be more complex and many a time difficult to decipher. But then practice
man one perfect.

DISTRIBUTION

Now let us come to the third phase in the SM game plan which is Distribution.
Distribution is the process where the SM is offloading their accumulated stock at a
much higher price.
It is not very easy to spot distribution. Many a times you will not see any congestion
areas. The UP move may slowly deteriorate and start rapidly deciding after a furl of
heightened activity. The Wyckoff puritans may disagree here.
In mark up phase after the stock has run up for some time you will the volume
diminishing and the spreads narrowing. The angle of ascent becomes lesser and
lesser. The stock trend may even flatten. This would mean that the demand is drying
up. The buyers are not willing to pay a higher price for the stock. Also sellers are
reluctant to offload their positions hoping and waiting for a better price. It is here the
SM slowly start offloading their stock. Much care is taken not to make it visible.
Volume is never too high. Prices are support at certain levels so that there is no
panic. Here it is important to take note of the volume price pattern and angle of
ascent. Too steep an ascent is also a problem. Suddenly you will see the stock
dropping down like stone from its high perch.
It is at the top you will see patterns like H&S and double Tops which are distribution
patterns.
Many times it is hard to maintain any semblance of the uptrend continuing and so a
sideways congestion move ensues. The congestion zone will be quite similar to the
zone we discussed earlier for accumulation. You will see the price being supported at
some support level and being contained within a resistance level. The points to take
note are the same ones we talked about in the accumulation zone. Just like in the
shake outs in the accumulation zone you will see a shakeout in terms of up thrust
bars. One has to be very careful trading the breakout from the distribution zone. If it
turns out to be the final climax move you will be left holding the bag. But then the
stock may goes for another up move. Here looking for uptrusts and other weak
indication becomes necessary. We will be talking about these indications later.
In the final climax run the stock explodes in terms of volume and price. Like I said
before the breakout traders , greenhorns rush in and the shorts will run for cover.
Then you will see many Uptrust Bars where distribution takes place with maximum
prices. There could be a series of Uptrusts and then.BANG.. the stock drops
down like a stone.

MARK DOWN

We now come to final step in the SM game plan, the Mark Down. When the SM has
disposed off most of the accumulated stock they start the most dramatic move of
crashing down the prices. Suddenly supply comes in plenty overwhelming the
demand. The price starts tumbling. The spreads dramatically widen. There is panic
selling from investors. But the prices drop so rapidly and most of the investors and
green horns that entered late never get a chance to off load there holdings.

Like the markup phase we will see some rallies in the downtrend. These are more off
reactions. Either the SM themselves try to shore up the price for their last bit of
holding. Day traders, Value Investors trying to bottom pick and the green horns
trying to Average contribute to these rallies. Our friend Saints calls averaging
Catching a dropping knife. I cannot find a better description for Averaging. It is
better to note the volume during the rallies. You will find the volume is more on
down days and less on up days. When the rally fails the average investor panic and
start selling and that accelerates the fall.
It may take weeks for the down trend to reach the bottom. The end is generally
indicated by a stopping volume or an absorption volume. The SM may be absorbing
the stocks to start the game again. You would find a High volume bar with long
spread and closing near the top.
It is during the mark down phase you will see rallies like the Dead Cat Bounce. Pay
attention to the volume pattern during these rallies.
The mark down phase is the most depressing and cruel part of the SM game plan. By
the end of it the SM would be taking delivery of his brand new E class Benz while the
average investor is scouting for a buyer for his run down maruti.
Of course the Markdown phase does offer good opportunities to smart investors who
are adept in short side trades.
But the mark down phase has a silver lining towards the end it offers the smart
investors many opportunity to enter into some really profitable trades. We will
discuss all these later.
--

Volume Spread Analysis

Now that we have a general idea about the SM operation we can step into the world
of VSA.
VSA involves analyzing each bar with respect volume, spread and close. We will
ignore the open. Also while analyzing the bar action we will also keep in mind the
general background of the market.
VOLUME SPREAD ANALYSIS
Finally. we will step in the actual VSA. VSA measures the weakness and strength of
individual bars. In addition it looks at the background strength/Weakness. So we
have to always look out for Weakness in a uptrend and for strength in a down Trend.
Each bar could be characterized to indicate Strength or Weakness based on the
Spread and volume.

We will start with looking out for weakness. First we will look into one of the most
easily identifiable and strong indication of weakness which is commonly called the
UPTHRUST Bar. And what a day to talk about Upthrust The charts are full of them
todayEven the nifty is showing a Upthrustof course not a one of the ideal one. But
distinct weakness shown on the nifty.
What is an UPTHRUST BAR ?
An Upthrust Bar is a wide range bar, with a high volume and closing down. It
indicates that the prices were marked up during the day (for simplicity we use day, it
is equally applicable on all time frames), the Trading activity was High as indicated
by the High volume and the prices dropped to near the low (or to the low) towards
the closing hours.
Looking the SM perspective what happened was that the SM marked up the prices in
early trading hours indicating strong bullishness. Enticed by this bullish move the
weak money also rushed to acquire the stock. Shorts if any would also have rushed
for cover. Meanwhile the SM is quietly distributing their holding to the weak money.
In the later part of the day the SM drastically marks the price down trapping the
weak money holding stocks at much higher prices.
In order to make this ideal, the Upthrust normally appears after a wide range upbar
with high volume. This makes it easy for the SM to markup the price and entice the
weak money. Most of the time the Upthrust will be moving into new higher territory.
The High of this bar will be much higher than the previous high.. High volume
should be an important consideration.
What are the Things to Looks for in a Uptrust?
1. High Volume and How high?
2. Wide Spread?
3. Close, near or on the Low?
4. What was the previous bar action?
5. Did the bar into new territory?
6. Is the stock in an up trend?
image: http://3.bp.blogspot.com/-V-CyyTd02I/TluFBhHUjtI/AAAAAAAAALQ/1irofgxga_8/s320/VPA-03.jpg

The Answers for the above would decide how potent the Upthrust is:
High volume Upthrust are a sure indication of weakness, higher the Volume the
stronger the indication. It may be even wise to get out of the stock if the Upthrust has
ultra high volume. Wider the spread more potent the Upthrust
Lower the closer the stronger the indication of weakness. Ideally it should close
should be the Low. If the close is towards the middle it would mean than the SM was
not successful in marking the price down. There was too much demand.
An ideal Upthrust will move into new territory. The High will be very much higher
than the high of the previous bar. This means the SM was really successful in
marking the price up and many traders get trapped into bad positions in the end of
the day.
Upthrusts are effective when the trend has been in force for some time. Sometime
you would find weak up thrusts in early trends.
Many times you will Upthrusts with low volume. I call them Pseudo Upthrusts. These
are not effective as the Upthrust. But are still signs of weakness..
image: http://2.bp.blogspot.com/yrky_94rE8A/TluFlJW_kxI/AAAAAAAAALU/5dp9e5RDRhU/s320/VPA-04.jpg

We looked at the Upthrust and Pseudo Upthrsts.. We also looked at what to look for
in an Upthrust Bar.
The obvious next question would be What to do when we see an Upthrust.
The next bar after the UPthrust is very important. That helps us decide our action.
If the next bar is a Downbar closing down it is clear that the weakness and set in and
the immediate trend is reversing. Here again the volume is an important indication.
If the volume is high then it time to get out and wait to short. If the volume is low the
weakness is not so pronounce and it may be worthwhile to wait and watch next bar
movement. Here the spread and the position of Bar also give clues. If the Bar is wide
closing down the weakness is more pronounced. Also if the high of the bar is towards
the low of the Upthrust bar the weakness is enhanced.
If the down bar is with low volume and closing Up then the weakness of the upthrust
bar is still in question. We have to wait for the enxt bar for confirmation.
If the Bar after the Upthrust bar is an Upbar closing up then it would mean that the
weakness projected by the upthrust is negated.
Let us look at another indication of weakness. If the stock has been moving up on a
high volume and then we encounter a down bar closing down towards low on high
volume is a sign of weakness. Volume need not be very high. Ideally the volume
should be higher than the previous two bars.
If you look at the enclosed chart the stock was moving up on higher volume. Then we
have the down bar closing down near the low. The volume is higher than the previous
two bars. Looks like the SM have been distributing. The next bar looks more like a
test for supply. The volume is low and the stock closing up. The low volume indicates
supply is lower. Then again a downbar on higher volume. The weakness is more
pronounced now. What followed is obvious
image: http://3.bp.blogspot.com/1diApSo_B7g/TluGnPXDLbI/AAAAAAAAALY/IgvcZRW7jvA/s320/VPA-05.jpg

NO DEMAND BAR
According to trade Guider/ tom Williams an Ideal No demand bar is a Upbar bar
with narrow spread closing in the middle or lower and the volume is less than the
volume of the previous bars. Though this is their basic definition I have seen subtle
difference in the No Demand bar throwing up different commentaries.
But in general any narrow spread low volume Upbar closing in the lower half of the
bar indicated No demand.
What does this no Demand Bar indicate?
A no Demand bar indicates that there is no support from the SM. The SM is not
interested in higher prices and they are supporting the stock. Whatever buying or
selling is from the stray weak money entering and exiting.
Consequently this indicates weakness. The No Demand bar does not indicate any
immediate reversal. While analyzing a No demand bar we have to look at the
prevailing background.
Does the background reflect weakness in terms of Upthrust or Pseudo upthrust? If
the background is weakness the No Demand bar indicates enhanced weakness.
If the background does not show weakness the No demand bar does show weakness
and does not necessarily indicate reversal. It only shows lack of participation from
SM. We may soon see the SM moving in to take the stock up further. So it would be
wait and watch time.
We will explore a little more on weakness indications. Upbars with high volume with
narrow spread and closing in the middle or low indicates that supply is swamping the
demand. This kind of bars would normally be seen near resistance lines. This by itself
does not portend great weakness. But the following bars would indicate whether the
supply is persisting or not. Persisting supply would definitely reinforce weakness.
Enclosing the chart of L&T for the recent times when supply came in at the resistance
line. The next bar shows that supply has decreased which encouraged the SM to push
further. But the move faltered at the next level.
image: http://4.bp.blogspot.com/CQhdzXTxc6g/TluHdywdsXI/AAAAAAAAALc/iG8YmLX7qvk/s320/VPA-06.jpg

Let us move on.

Currently we are discussing weakness. One last indication before we take up
strengths is called Effort without Result
After accumulation phase is over the SM gets ready for the Mark Up Phase. In order
to move the stock up the SM has to put in some effort. The effort to move the market
up can be seen as wide spread upbars closing near the top with increased volume.
The volume would never be excessive. It is easy to identify these bars.
If the effort to move up results in the stock moving up, the effort has yield the
desired result. Many times you will find an effort to move up bar and the next bar
would be high volume bar closing near the low indicating large supply coming in
swamping the demand. So the effort to move up has not yielded the desired result.
Frequently you would find such a situations at high resistance / high supply areas.
These Efforts without result are good indications of weakness. Most of the times you
will find the stock moving down or side ways after this failure. This is because the SM
would rather wait for the supply to vanish before repeating the effort. The SM will
then test the market for supply before trying to move up further. The repeat move
could be good entry points.

Test for Supply

Now let us move on to the indication of strength. One of the most powerful
indication of strength is the Testing for Supply.

image: http://3.bp.blogspot.com/-ZbkwL3S1SQ/TluI4gQbSnI/AAAAAAAAALg/Y0W429ofaKc/s320/VPA-07.jpg

After down trend when the SM has accumulated enough and is ready to move the
stock up again they test if there is still supply present. Also in an uptrend if the SM
encounters large supply they would pause till the supply disappears. Then they would
check again to see supply is present.
The Testing for supply is done by rapidly marking down the price. If the stock
recovers towards the high and the volume is low it would mean that there was no
supply. If the volume is high and if the stock fails to recover it would mean that there
still supply present. Low volume or less trading activity indicates a successful test.
A TEST bar typically dips into a previous high volume area and recovers to close near
the high on low volume.
A test bar viewed in isolation does not signify anything. It necessary to look at the
background to ascertain the strength of the Test bar. If there has been absorption
volumes just before the Teat bar the strength of the test bar becomes more
significant.

STOPPING Volume

Now we will move further. The next VSA indication we will discuss is called the
Stopping volume, also called absorption volume.
Normally in a down trend you will see a down bar with high volume bar closing on
the upper side. This is called a Stopping volume. This indicates that the SM is
absorbing all the stocks. The SM has decided to start the game all over again and
have decided to stop the down tide and start accumulating. As a result the stock will
soon see side ways movement or go into a long accumulation phase. In effect the
stopping volume or absorption volume indicates that the long bearish move is likely
to end soon.
An Ideal Stopping Volume bar will be down bar with high volume and closing near
the top. However most of times you would see the close on the upper half of the bar.

image: http://4.bp.blogspot.com/--smNIoladE/TluLoxEFyjI/AAAAAAAAALk/N4WejiJK73s/s320/VPA-08.jpg

Stopping volume occurs after long down trend. Stopping volumes are basically alert
to the impending reversal.

No Supply
Next Indication we are going to look at is called No Supply. As the name signifies
this bar indicates absence of supply and indicates strength.
The No Supply bar is a narrow range low volume down bar closing in the lower half.
The No Supply bars are found in the early Bottom reversals and indicate strength. It
is also common to find these bars in an up trend which are indications of
continuation of the trend. They would also be found on consolidation bases.
A No Supply indication has to be read in context with background. At bottom
reversal areas they indicate there is no supply available. Then the SM gets ready for
mark up. Hence they indicate strength especially if they appear before/after test bars.
image: http://2.bp.blogspot.com/RR38r6OPZSQ/TluMV8UQihI/AAAAAAAAALo/wNOH_H_KY1g/s320/VPA-09.jpg

During up moves a No supply could indicate non participation from SM. IMHO this
is one of the difficult indication to interpret.

VOLUME at Support and Resistance

An important thing to note here is that the Resistance areas do not represent large
supply waiting to be dumped. In the same way the Support areas do not represent a
huge demand waiting to lap up all the supply coming in.
It is better to consider the resistance areas are zones where selling pressure increase
and support areas represent zones where buying pressure increases.
Now the question is what Resistance and support has to do with VSA? As mentioned
earlier the SM generally give due respect to the Resistance and Support areas as they
represent zones of Selling pressure and Buying pressure.
In general increased volume with increased spread as the stock approaches a
resistance area is a bullish sign. Falling volume and decreased spread would mean
that stock would be stalled at these areas.
In the same way decreased volume and spread as the stock approaches support area
is sign that the stock would take support in that area and reverse. Increased volume
and spread would indicate that chances of the stock breaking the support are more.
If Resistance areas are crossed with high volume it is a sign of bullishness and if the
crossing is with low volumes caution is advice. In the same way if supports are
broken with high volume it is a sign of bearishness and low volume crossing should
be viewed with caution. Going short on a low volume break of support could result in
a bad trade.
The SM often attempt to push through the Resistance areas with a huge volume.
These are clearly evident on the charts in terms of high volume wide range bars.
In general it always pays attention to resistance zone even if you are using you own
trading systems. When Buy signals are generated near resistance zones one has to
be careful.

TRADABLE BASES DURING TREND CHANNEL

Accumulation bases can be found in various shapes and sizes. The most common
recognizable one is the one where the stock moves sideways in a narrow range and
the volume has dried up.. However we will also find rectangular bases where the
stock moves up and down but restricted within a wider range. You will find weakness
coming in at the top of the range and strength at the bottom of the range.
Many of the ranges are easily tradable. For a trader or investor with longer term view
the idle time to get in would be when the stock bounces back from the support line.
This way it the stock breakout he would have the idle entry point. He also has the
option to quit at the stock fails to cross the resistance at the range top, For a short
term trader who is adapt in trading the long and short this kind of base provides
good opportunities to go long at the support line and go short at the top of the range.
Here is just an example of tradable base:

image: http://2.bp.blogspot.com/l0oDfQRYESI/TluOJHpcHUI/AAAAAAAAALs/gRbWW0BfjxU/s320/VPA-10.jpg

Read more at http://dsediscovery.blogspot.com/p/volume-priceanalysis.html#mWStK3jRkzqOeiQO.99

Introduction to Volume Spread Analysis (VSA)

You have heard of Volume Spread Analysis and the value it might add to your analysis.
But it sounds like a convoluted trading method with uncommon terms like No Demand
Bar and Stopping Volume.

Is VSA really that inaccessible?

Together, lets take the first step to understanding VSA.

With this guide, you will find that VSA is an intuitive method after all.

WHAT IS VOLUME SPREAD ANALYSIS (VSA)?

VSA is the study of the relationship between volume and price to predict market
direction.

In particular, it pays attention to:

Volume
Range/Spread (Difference between high and close)
Closing Price Relative to Range (Is the closing price near the top or the bottom of the
price bar?)

WHO INVENTED VSA?

There are three big names in VSAs development.
Jesse Livermore
Richard Wyckoff
Tom Williams

Jesse Livermore spoke of a theory based on market manipulation. He also worked his
theory in his legendary trading career. However, he did not pass down concrete trading
methods. His legacy is that of a trader and not an educator.

Richard Wyckoff was much more interested in education. To find methods that work in
the markets, he interviewed top traders including Jesse Livermore. Wyckoff proposed the
idea of a Composite Trader that embodies the entire market. He used the Composite
Trader to explain the market phases of accumulation, markup, distribution, and
markdown.

Neither Jesse Livermore nor Richard Wyckoff used the term Volume Spread Analysis. It
was Tom Williams who used the term to describe the methods he built based on the

Richard Wyckoffs ideas. Tom Williams books and software has helped to propel the
concepts of VSA among traders.

WHY DOES VSA WORK?

The basic idea is that the public can only make money from the markets if we understand
what the professional traders are doing. And professional traders are not small players.
They play big.
Hence, they leave their footprints in volume data. When the professionals are active, the
market shows high trading volume. Conversely, when the market volume is low, the
professionals might be holding their horses.
It follows that in order to get a sense of what the big guys are up to, looking at just price
action is not enough. We need to look at price together with volume.

DOES VSA WORK IN ALL MARKETS?

VSA focuses on price and volume and seeks to find the actions of professional traders.
Hence, as long as a market has a group of professionals and offers reliable price and
volume data, the trading premise of VSA holds.
Almost all financial markets (stocks, futures, forex) seem to fit the bill.
However, in the spot forex market, volume is a tricky concept. You will not get actual
traded volume. You get tick volume which measures the times the price ticks up or down.
If you intend to use VSA methods for trading spot forex, you need to decide if your source
of tick volume is a reliable proxy for actual volume.

HOW DO WE USE VSA TO TRADE?

I will not sugar-coat the fact that VSA is difficult to master. This is because traders have
interpreted various VSA concepts differently. To trade well with VSA requires years of
practice and market observation. (Consider how much time Jesse Livermore, Richard
Wyckoff, and Tom Williams spent studying the markets.)
Nonetheless, we can still improve our trading with basic VSA concepts that are easy to
understand. Hence, in this first guide, we will look at two simple VSA concepts.
No Demand
No Selling Pressure

VSA BASIC CONCEPTS

1. NO DEMAND ON UP BAR
If the market rises with contracting spread and volume, the market is not showing
demand. Without demand, it is not likely to continue rising.

To find No Demand bars:

1)Price closed higher than the previous bar.
2)Volume is lower than past two bars.
3)Spreads (Range) are narrow.

2. NO SELLING PRESSURE ON DOWN BAR

If the market falls with decreasing spread and volume, the market is not interested in
selling.
Thus, it is not likely that the market will continue to fall.

To find No Selling Pressure bars:

1)Price closed lower than the previous bar.
2)Volume is lower than past two bars.
3)Spreads (Range) are narrow.

VSA TRADING EXAMPLES

In the two examples below, we will use a 20-period simple moving average as our trend
indicator. Our aim is to use the concepts of No Demand and No Selling Pressure to
find trend retracement trades.
In the charts below, I have marked the No Demand bars with red arrows and the No
Selling Pressure bars with green arrows. (Click on the images to zoom.)

1. NO DEMAND BAR POTENTIAL SHORT TRADE

This chart shows the daily bars of Deere & Company (DE).
1)This bar punched below the SMA and hinted at an impending bear trend.
2)These three consecutive No Demand bars confirmed the lack of market interest to
resume the bullish run.
3)Hence, we had a great context for considering a short trade.

2. NO SELLING PRESSURE POTENTIAL LONG TRADE

This chart shows the daily bars of The Proctor & Gamble Company (PG).
1)The market was in a strong bull trend and remained above the SMA.
2)In this sideways pullback, we observed three No Selling Pressure bars.
3)They hinted that the bears are not forthcoming, and the stage for a bullish retracement
trade was set.
4)This bullish Pin Bar offered the ideal setup bar.

WHERE CAN WE LEARN MORE ABOUT VSA?

VSA is gaining in popularity, and there is no lack of resources to advance your
understanding.

But I am sure that no software will bring you trading success unless you truly understand
the VSA principles. Hence, you should definitely learn as much as you can about VSA,
before relying on a software for your analysis.

RELATED VOLUME STRATEGIES

These are not classic VSA methods, but they will help you understand the interaction
between price and volume.
1)Low Volume Pullback
2)Low Volume Pullback (Expanded)
3)Anchor Bars
4)On-Balance Volume

CONCLUSION VSA
Volume is valuable because it offers another market dimension for analysis. Volume is
also dangerous because it confuses those who do not understand it.
Take one step at a time. Pick up VSA concepts steadily and use them in your trading
prudently. Once volume starts to make sense to you, you will see progress but
improvements will not come overnight.

CHECKLIST FOR VOLUME SPREAD ANALYSIS - SHORT NOTES

Volume Spread Analysis look into volume, spread and close. we will also keep in mind
the general background of the market.

Checklist
The best entrances within a trend is when we see a no supply (within an uptrend) or a no
demand (within a downtrend). Why? The professionals (market makers and syndicates)
want to test for professional interest in a given direction. The tests (no supply, no
demand) give us an idea of the supply/demand balance and professional interest and
that's what we're looking for to determine strength and weakness.

No supply: A bar that goes up, yet closes off its highs and has lower volume than the
previous 3 bars.

No demand: A bar that goes down yet closes off its lows and has lower volume than the
previous 3 bars.

Checkbook for going long:

1. Higher highs/lows
2. No excess supply coming in.
3. No supply

Checkbook for going short:

1. Lower highs/lows
2. No excess demand coming in.
3. No demand

Exits: Excess supply/demand coming against you on lower TF's or ND's/NS's in the other
direction.

Notes taking from PDF files from Volume Spread Analysis book.
The SM basically moves the market in four phases as follows

1. Accumulation
2. Mark Up
3. Distribution
4. Mark Down

1) One of the most important characters of congestion areas is the Low Volume. When
most traders are bullish or bearish the volume is high.

2) Accumulation area: a)Indecision should be visible. b) volume should be narrow. (low

and quite). No huge upsurge. c) The spread of the bars(High-Low) should be narrow. d)
Volume should shrink near the support line and expand near the resistance line. f) check
on the volume pattern as well.

Breakout

The volume need not be very high at all.

Since there is no supply (SM have the majority of the floating stock).
If the volume is moderate we should see it coming in strongly soon. Otherwise the move
will collapse and stock would return to the base.

We should see a large swift increase in the volume in case of a genuine breakout.
The stock should be closing near the top. Also too much volume is not good. It would
mean too much supply is coming in.

Heavy volume with the stock closing in lower half would definitely mean supply coming
in. Typically an 150% increase in volume with the close near the top would indicate a
successful breakout.

The breakout is just the beginning. Then the stock moves up in stages.
Each stage would be an advance at higher volumes and a retracement at lower volumes.

The end of downtrend is generally indicated by a stopping volume or an absorption

volume. The
SM may be absorbing the stocks to start the game again. You would find a High volume
bar with long spread and closing near the top.

Upthrust Bar
An Upthrust Bar is a wide range bar, with a high volume and closing down ( towards
closing hours).

Upthrusts with low volume - I call them Pseudo Upthrusts.

Things to look out for in Upthrust,

1) High Volume and How high?

2. Wide Spread?
3. Close, near or on the Low?
4. What was the previous bar action
5. Did the bar into new territory?
6. Is the stock in an uptrend?

Wider the spread more potent the Upthrust .

Lower the closer the stronger the indication of weakness.
If the close is towards the middle it would mean than the SM was not successful in
marking the price down. There was too much demand.

***The next bar after the Upthrust is very important. That helps us decide our action.***

Upbars with high volume with narrow spread and closing in the middle or low indicates
that supply is swamping the demand. This kind of bars would normally be seen near
resistance lines. This by itself does not portend great weakness. But the following
bars would indicate whether the supply is persisting or not.

No Demand Bar

No demand bar is a Upbar with narrow spread closing in the middle or lower and the
volume is less than the volume of the previous bars. A No Demand bar indicates that
there is no support from the SM.

***While analyzing a No demand bar we have to look at the prevailing background.***

If the background does not show weakness the No demand bar does show weakness and
does not necessarily Indicate reversal. It only shows lack of participation from SM. We
may soon see the SM moving in to take the stock up further.

Testing for Supply

The Testing for supply is done by rapidly marking down the price.
If the stock recovers towards the high and the volume is low it would mean that there
was no supply.
If the volume is high and if the stock fails to recover it would mean that there still supply
present.
Low volume or less trading activity indicates a successful test.

A TEST bar typically dips into a previous high volume area and recovers to
close near the high on low volume.
If there has been absorption volumes just before the Test bar the strength of
the test bar becomes more significant.

Stopping Volume normally in downtrend

Down bar with high volume bar closing on the upper side. This is called a Stopping
volume. This indicates that the SM is absorbing all the stocks.

**An Ideal Stopping Volume bar will be down bar with high volume and closing near the
top**
However most of times you would see the close on the upper half of the bar.

Reverse Upthrust
Upthrust bar we will find in a bearish move a High volume wide range up bar with the low
chartering into new lows and the closing will be near the high.
The reverse Upthrust is rare and is found rarely at bottoms.
Any high volume wide range upbar in a down trend would indicate strength.

No Supply Bar:
-Indicates absence of supply and indicates strength
No Supply bar is a narrow range low volume down bar closing in the lower half.
A No Supply indication has to be read in context with background.
They indicate strength especially if they appear before/after test bars

Resistance Area and support Area

Resistance areas are zones where selling pressure increase and Support areas represent
zones where buying pressure increases.

**Increased volume with increased spread as the stock approaches a

resistance area is a bullish sign.
Falling volume and decreased spread would mean that stock would be stalled at these
areas.***

**Decreased volume and spread as the stock approaches support area is sign
that the stock would take support in that area and reverse.
Increased volume and spread would indicate that chances of the stock breaking the
support are more.**

RETRACEMENT,
1. Lack of volatility
2. Small spreads
3. Decreased Volume

REVERSAL,
1. Increased Volatility
2. Large spreads. Especially Effort to Fall bars.
3. Increasing volume