We take great steps to make sure everything painted to your chart is relevant, valid, and necessary (and it is) but we do get questions now and then from newer users that don’t understand some key differences between standard volume spread analysis and Smart Volume Spread Analysis. I plan on addressing more of these in future articles but for today we’ll discuss signal validity.
Volume Spread Analysis is a bit of a misnomer. What we really are looking at is activity as represented by volume. Most VSA is done completely wrong in this regard. Volume analysis signals by themselves mean nothing without understanding the underlying mechanics of the market they appear. For example New York i s more heavily traded than Asia. Volume in New York is higher than in Asia is a true statement but does this mean that activity is lower in Asia than in New York? Technically yes but that really doesn’t get us any closer to understanding what is really happening at that moment. When using Volume Spread Analysis you need to apply one more component that almost no one ever mentions or uses… Time. Smart Volume Spread Analysis always takes things to the next logical step. I will give a simple example of what I mean.
When is a signal not a signal?
A No Demand Bar at the Start of Asia is not valid. Why? One thing we ask clients to start doing when starting with our concepts, is to take a step back and think logically about what might be happening in addition to what is on the chart. Take the No Demand Statement above. Why might that be true? Volume is lower and the signal appears on your chart so why is it not valid? Time. Logically we can assume that demand drops off from New York not because there is less demand but rather because trading activity is lower in Asia. So while standard VSA says there is No Demand, looking at volume alone you miss this critical distinction. This organic drop off in volume is quite normal and doesn’t show true demand or lack thereof. Trading in Asia is likely what it is normally. This one simple change in how you think about volume spread analysis will completely change your trading for the better. I’ll address similar concepts here in future articles. I discuss many concepts like this free in one on one consultations but I want to make these concepts of mine available to a wider audience than I can reach one on one. As always our next update will include many logic based tools to address a lot of the weaknesses (including this one) we find in standard volume spread analysis. Once that update is available we’ll start focusing again on the automated systems, index and commodity methods, and basket trading methods.
As always Smart does most of the guesswork for you and frees you up to trade but its a good starting point to getting better at trading using Smart Volume Spread Analysis. Always apply logic and think about what may be happening ‘within’ the volume. News, True Market Activity, etc all play a vital role along side Volume Spread Analysis.
If you have any questions about this article, it’s concepts, or our software, please contact me using the support link on the website.