Volume Spread Analysis (VSA) is a powerful methodology for reading the intentions of professional traders, often called smart money. Developed by Tom Williams based on Richard Wyckoff's methods, VSA examines the relationship between price spread, volume, and closing price to understand supply and demand dynamics. In this guide, we will explore how VSA works and how to use it in your trading.
What is Volume Spread Analysis?
VSA is a method of analyzing markets by looking at three key elements of each price bar: the spread (range from high to low), the volume, and the close location within the bar. By analyzing these elements together, you can determine whether professional traders are buying, selling, or doing nothing.
Core Principle: Smart money leaves footprints in the market through volume and price action. VSA teaches you to read these footprints to understand what the professionals are doing, so you can trade alongside them rather than against them.
The Three Elements of VSA
1. Spread (Price Range)
The spread is the range from the bar's high to its low. Spreads can be classified as:
- Wide spread: Large range, indicating strong activity
- Narrow spread: Small range, indicating lack of interest or absorption
2. Volume
Volume shows the level of activity. Compare current volume to recent average:
- High volume: Significant activity from professionals
- Low volume: Lack of professional interest
3. Close Location
Where the bar closes relative to its range:
- Close near high: Buyers were in control
- Close near low: Sellers were in control
- Close in middle: Neither side won decisively
Key VSA Patterns
Signs of Strength (Buying)
Stopping Volume
After a downtrend, a bar with high volume but narrow spread that closes off its lows. This indicates that professional buying is absorbing the selling, stopping the decline.
Test
A bar that dips into an area of previous support with low volume and closes near its high. This shows that there is no selling pressure at these levels, confirming that supply has been absorbed.
No Supply Bar
A narrow spread down bar with low volume, usually following a rally. This shows that sellers are not present and the uptrend is likely to continue.
Signs of Weakness (Selling)
Upthrust
A bar that pushes above resistance with wide spread but closes near its low on high volume. This shows that professionals are selling into the breakout, trapping buyers.
No Demand Bar
A narrow spread up bar with low volume, usually following a decline. This shows that buyers are not interested and the downtrend is likely to continue.
Climactic Action
Very high volume with wide spread after a prolonged uptrend, especially if the close is in the middle or lower portion. This indicates that professionals are distributing to eager public buyers.
Effort vs Result Principle
One of the most important VSA concepts is comparing effort (volume) to result (price movement):
- High effort, high result: Volume and price move are proportional. The market is behaving normally.
- High effort, low result: High volume with small price movement. This is anomalous and suggests absorption or resistance.
- Low effort, high result: Large price move on low volume. This may indicate a lack of opposition, suggesting the move could continue.
VSA Trading Strategies
Strategy 1: Accumulation Trading
Look for signs that smart money is accumulating shares.
- Identify a downtrend or consolidation area
- Watch for stopping volume (high volume, narrow spread, close off lows)
- Wait for successful tests (low volume dips that close near highs)
- Enter on a no supply bar or after a test holds support
- Target the top of the range or prior resistance
Strategy 2: Distribution Trading
Look for signs that smart money is distributing shares.
- Identify an uptrend or rally into resistance
- Watch for upthrusts (high volume breakouts that fail)
- Watch for no demand bars (low volume rallies)
- Enter short when price fails to make new highs on low volume
- Target the bottom of the range or prior support
Strategy 3: Trend Continuation
Use VSA to confirm trend strength.
- In uptrends, look for no supply bars on pullbacks (confirmation to stay long)
- In downtrends, look for no demand bars on rallies (confirmation to stay short)
- Exit or reverse when you see signs of weakness in an uptrend or strength in a downtrend
The VSA Process
- Determine background: Is the market in an uptrend, downtrend, or range?
- Analyze the current bar: What is the spread, volume, and close location?
- Consider context: What happened on previous bars? What is the overall picture?
- Form a hypothesis: Based on VSA principles, what are professionals likely doing?
- Wait for confirmation: Do not act on a single bar. Wait for the next bars to confirm your analysis.
Common VSA Mistakes
- Reading bars in isolation: Always consider context and background
- Ignoring the trend: VSA signals are more powerful when aligned with the larger trend
- Acting too quickly: Wait for confirmation before entering trades
- Over-complicating: Focus on the basic principles before adding complexity
- Expecting perfection: VSA is about probabilities, not certainties
Combining VSA with Other Analysis
VSA and Support/Resistance
VSA signals at key support and resistance levels are more significant. A test at major support is more powerful than a test in the middle of nowhere.
VSA and Chart Patterns
Use VSA to validate or invalidate chart patterns. A breakout with proper volume characteristics is more likely to succeed than one showing distribution.
VSA and Indicators
VSA can complement indicators like RSI or MACD. When VSA and indicators both suggest the same thing, the signal is stronger.
Track Your VSA Trading
Pro Trader Dashboard helps you analyze your trades and understand how well you are reading volume and price action. Improve your VSA skills with detailed performance tracking.
Summary
Volume Spread Analysis is a sophisticated methodology for understanding what professional traders are doing. By analyzing the relationship between spread, volume, and close location, you can identify accumulation, distribution, and trend continuation signals. Remember that VSA is about reading the story the market is telling through volume and price action. Focus on the key patterns, always consider context, and wait for confirmation before taking trades.
Continue your volume analysis education with our guides on Volume Breakouts and Volume Price Analysis.