Volume Spread Analysis

The art of successful forex trading is to find a trading strategy that fits your attitude towards risk and your personality, while not neglecting to consider the number of losing positions your account balance can afford to take.

There are a number of different ways to trade forex and every successful trader believes their way is the best, with countless programmes available on the internet promising untold riches.

However, one way to help form a winning strategy can be by the use of volume spread analysis (VSA). VSA is a form of technical analysis which means that it considers price patterns and trends rather than using research, earnings and new developments which is what fundamental analysts believe. A technical analyst bases his strategy on the notion that trends are already incorporated into the price history and to successfully trade, the trend just needs to be uncovered.

Some traders use a combination of fundamental and technical indicators but the forex market is particularly filled with traders using technical analysis. In a study conducted on the market movements prior to 1987, it was determined that technical markers were able to bring the steadiest and most consistent returns, with its only notable failures when external forces, such as central banks, manipulated the currency or intervened in the market.

VSA is a particular form of technical analysis which assesses the volume compared to the price action. Whilst still using typical chart indicators, VSA also considers "crowd mentality" and incorporates what the balances of supply and demand will do to the market and when it is likely to move. It is for this reason that many have described VSA as incorporating some of the principles of fundamental analysis, thus creating a fusion of the two methods.

VSA looks at volumes to establish what the professional players in the market are doing and how prices are being manipulated by volume. It does this by looking at three components: the price versus volume, the closing price and the price range. To explain the underlying principle is simple terms, VSA aims to discover the reason for price movements. Price movement is always caused by an imbalance between the market supply and demand, but it is understanding what is driving these changes by analysing the volumes which allows a trader to predict future movement.

VSA is based on the principle that the charts show when professional traders are pulling in or out, but this will not always be obvious from the price, but the tell-tale signs are the volume. Professionals may try to manipulate the price downwards, leading to false indicators of an upcoming downward curve, sending many traders selling and allowing the professionals to pick up the stock at a lower price before it curves back upwards. However, professionals are unable to hide volume of movement and it is this abnormality of volume which is the giveaway for any VSA trader.

When trading forex it is entirely up to the individual trader what types of analysis, if any, he chooses to use to help form an effective strategy. VSA incorporates the best of technical and fundamental approaches, which many feel is the secret of its success.

Learn more in this Volume Spread Analysis video