Many traders overlook the importance of volume accounting in trading. The price is driven by large capitals, so by the volume of trades one can understand what is in the minds of large market players.
VSA (Volume Spread Analysis) is a rather interesting technique for analyzing volumes that can improve your trading results, regardless of the type of strategy used. Considering that initially the method was not developed for binary options, we specially adapted all the key points to the specifics of the BO market.
The essence of the VSA method
VSA (from volume spread analysis) is a technique for analyzing trade volumes taking into account the size and shape of the candlestick body. VSA helps to determine when large capitals exit the market that is, the end of the trend is nearing and it is time to exit the position. Also, this technique shows the current phase of the trend and traps set by market makers that should be avoided. Thus, with the help of VSA techniques, you can determine the optimal moment to enter the market.
When the market volume is too small, but the price nevertheless moves forward, sooner or later it will stop and start moving back. If at such a moment your trading strategy gives a signal to enter the trend, it is best to skip it. Given the small volume, the price simply won’t have enough moment to continue moving forward.
VSA is about the big picture. That is, we can only determine how small or large the volume of an individual candlestick is by comparing it with the data of previous candles. Candle volume can be of two types:
- Bullish volume determines the growth of volume on up bars (up trend), decrease on down bars (down trend). This means that large players buy on ascending candles, but do not sell on descending ones;
- Bearish volume defines an increase in volume on down bars and a decrease on up bars. That is, when the rate increases, the volume almost completely disappears.
Better Volume indicator
The analysis uses tick volume and candlestick charts. The most convenient way to perform analysis is on the MetaTrader 4 platform, for which several versions of the Better Volume indicator have already been written.
To install, download the indicator file and move it to the terminal data directory: File Open data directory MQL4 Indicators, and restart the program. To launch the indicator, simply drag it from the navigator window onto the chart.
Almost all parameters can be left at their default values. The indicator signals are most influenced by the LookBack period, which is 20 bars by default. The larger the value of the period, the less often new signals will come only the most significant ones will remain.
The indicator has 4 color signals in its arsenal:
- Red indicates the presence of a large up-bar with a corresponding volume size;
- White (dark blue) signals the presence of a large down bar and a large tick volume;
- Yellow is a relatively low volume bar;
- Green is a small bar with relatively high volume.
Up-thrust model
Up-thrust is a reversal model according to the VSA system. According to the rules, this is a large candlestick with a close near its minimum (below the middle) which determines the strength of the pattern. Also, the candle is accompanied by a large trading volume. This formation usually occurs at the peaks of upward movements and indicates a likely trend reversal.
Confirmation is the appearance of a down bar with a close near the low and relatively large volume. Ideally, the peak of the candlestick should be near an important resistance level. After the candle closes, we enter the market using the Put option with an expiration of one candle.
As a rule, this is a candlestick with a close near its maximum (above the middle) and a large volume. It occurs at the end of downward movements and is a possible signal for a trend change to an upward one.
Buying/Selling Climax
When analyzing, you need to take into account the current phase of the market: accumulation, when large players gradually accumulate positions; and distribution when they sell positions. The fact is that big money cannot enter the market at once “for everything”, otherwise a sharp change in price will occur and the latter will become unprofitable. Therefore, a large position is recruited in parts.
As a rule, the most profitable place to accumulate a large position is the corrective phase of the trend. Having exhausted the available liquidity, the price returns to the started movement again. On the next pullback, accumulation occurs again, and so on.
Accumulation is followed by a distribution phase. As a rule, this happens after the appearance of large candles on the chart the culmination of purchases or sales.
The buying climax is characterized by a large up-bar with a correspondingly large volume. This is displayed on the chart as a high red bar. The selling climax is the opposite it is determined by a large down bar with the same large volume