Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

[Tutorial] Introduction to Volume Spread Analysis and History of VSA – Part 1

2 min read

Volume Spread Analysis (VSA) is a method of analyzing the stock market that uses volume, price, and spread data to identify buying and selling pressure. Developed by Tom Williams, a trader, and author, VSA is based on the idea that the market is driven by the actions of professional traders, also known as “smart money.” These traders use volume, price, and spread to conceal their actions and intentions, but VSA can help to uncover them.

Nifty Futures – Volume Spread Analysis Charts – Hourly Timeframe

Volume Spread Analysis is a bar by bar analysis and following things are observed to understand the market activity.

  • Volume bar at every bar
  • closing price of the bar
  • spread (high-low range) of the bar

History of Volume Spread Analysis

The history of VSA can be traced back to the early 20th century and the work of Richard Wyckoff, a stock trader and market analyst. Wyckoff developed a method of market analysis that focused on the relationship between price, volume, and market structure. He believed that the market was driven by the actions of professional traders and that these traders left behind clues in the form of price and volume data.

Wyckoff’s work laid the foundation for VSA, but it was Tom Williams who popularized the method and developed it further. In the late 1970s, Williams began to study the market using Wyckoff’s method and found that it was an effective way to identify buying and selling pressure. He also discovered that professional traders used volume, price, and spread to conceal their actions and that by analyzing these data, it was possible to uncover their intentions.

The principles of Volume Spread Analysis (VSA) were developed by Tom Williams, a former syndicate trader who observed that the markets were being manipulated and that the key to understanding the market’s true movements lay in the relationship between volume, the spread of the bar, and the closing price. Williams built on the work of Richard D Wyckoff, a well-known trader from the 1920s and 1930s, who created the Stock Market Institute in Phoenix, Arizona and wrote several books on trading the markets. Wyckoff’s work focused on analyzing trading ranges and determining when stocks were in basing, markdown, distribution, or mark-up phases and shifts between public ownership and “smart money” or professional traders. Williams then spent years studying and computerizing this system, which is now taught as a methodology

In 1985, Williams published his book, “The Undeclared Secrets That Drive the Stock Market,” in which he outlined his VSA method. The book became a best-seller and sparked widespread interest in VSA. Since then, Williams has continued to develop and refine the method, and today it is used by traders and investors around the world.

VSA Principles

The basic principle of VSA is that professional traders use volume, price, and spread to conceal their actions. By analyzing these data, it is possible to uncover their intentions. VSA is based on the idea that the market is driven by the actions of professional traders, and that these traders leave behind clues in the form of price and volume data. The method uses these clues to identify buying and selling pressure and to predict market movements.

Supply and Demand

The “supply and demand” principle is a fundamental concept in Volume Spread Analysis (VSA). It states that professional traders, also known as “smart money,” control the supply and demand in the market. They buy when they believe that the market will rise, and they sell when they believe that the market will fall. By analyzing the volume, price, and spread data, it is possible to identify when professional traders are buying and selling.

By analyzing the volume, price, and spread data, it is possible to identify when professional traders are buying and selling, and to predict the direction of the market. The supply and demand principle is a key concept in VSA and understanding it can help to improve your trading decisions.

Cause and Effect

Another important concept in VSA is the “cause and effect” principle. Professional traders’ actions in the market have a direct effect on the price and volume. By analyzing the data, it is possible to see the cause of the market’s movements and to predict the effect.

VSA is a powerful tool for traders and investors, but it is not without its limitations. The method is based on the idea that the market is driven by the actions of professional traders, but this is not always the case. The market can also be influenced by other factors such as economic conditions, political events, and natural disasters. Additionally, VSA is based on historical data, and the future is not always predictable.

in the next part we will be looking into the basic terminology and internals of understanding VSA better. Stay tuned!

Rajandran R Telecom Engineer turned Full-time Derivative Trader. Mostly Trading Nifty, Banknifty, USDINR and High Liquid Stock Derivatives. Trading the Markets Since 2006 onwards. Using Market Profile and Orderflow for more than a decade. Designed and published 100+ open source trading systems on various trading tools. Strongly believe that market understanding and robust trading frameworks are the key to the trading success. Writing about Markets, Trading System Design, Market Sentiment, Trading Softwares & Trading Nuances since 2007 onwards. Author of Marketcalls.in and Co-Creator of Algomojo (Algorithmic Trading Platform for DIY Traders)

[Tutorial] Introduction to Volume Spread Analysis and History of…

Volume Spread Analysis (VSA) is a method of analyzing the stock market that uses volume, price, and spread data to identify buying and selling...
Rajandran R
2 min read

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