Volume Spread Analysis

The art of successful forex trading is to find a trading strategy that fits your appetite for 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 currencies and every successful trader believes their way is the best, with countless expert advisors available on the internet promising easy profits.

However, one way to trade successfully 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 use. A technical analyst bases his strategy on the notion that trends are already incorporated into the price history and that identifying the current trend will allow you to make money.

Some traders use a combination of fundamental and technical indicators but the forex market tends to lean more towards the use of technical analysis. In a study conducted on the market movements prior to 1988, it was determined that technical markers were able to bring the steadiest and most consistent returns, with the only notable exceptions being 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 current volume in relation to price action. Whilst still involving a chart indicator, 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 different approaches.

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: prices versus volume, closing prices and price ranges. To break down this underlying principle into simple terms, VSA aims to discover the reason for price movements. Price movement is always caused by an imbalance between the market's supply and demand, but it is an understanding of what is driving these changes - by analysing the volumes - that 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 more telling signs are the volumes. Professionals may try to manipulate a price to the downside, leading to false indicators of an upcoming downward slope, sending many traders selling and allowing the professionals to pick up the currency pair at a lower price before it curves back upwards. However, professionals are unable to hide the volume of a move and it is this volume abnormality that is the giveaway for any VSA trader.

When trading forex it is entirely up to each individual trader to decide what types of analysis they choose 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 great success.

Learn more in this Volume Spread Analysis video