Introduction

The two most well know school of thought in stock market investing have been discussed in previous “iVSA Article 2: Introduction to Fundamental Analysis and Technical Analysis” (http://klse.i3investor.com/blogs/ivsatradingtipsandplans/94910.jsp). In short, Fundamental Analysis focuses on explaining “why” a company’s share price will go up by analyzing the company’s fundamentals, while Technical Analysis focuses on explaining “when” a company’s share price will go up by analyzing its historical price trends and past price behavior. However, there is a third approach in analyzing “why” and “when” simultaneously, called Volume Spread Analysis (VSA).

iVSA is based on the First Order of Analysis, namely Price & Volume, which is why VSA analytic indicators are always trend leading versus traditional Technical Analysis as shown in the following table.

VSA studies the relationship between price and volume to predict short term market direction with great accuracy. In respect, it looks into:

1. Closing Price

2. Price Spread

3. Volume

In VSA trading method, it pays greater attention using Japanese Candlestick chart compared to bar charts. Japanese Candlestick depicts emotions of the market at the current bar. There are three big names in VSA’s development, namely Jesse Livermore, Richard Wyckoff and Tom Williams and. All of them were big time speculators during their heydays. Tom Williams is still practicing the VSA form of chart reading till today from his home in Southern England.

In VSA system, the price movements of stocks are due to the imbalance between supply and demand. The cause of these imbalances is mainly due to market makers, professional traders or “Smart Money”. In order to detect and take advantage of these movements, VSA looks into the inter-relationship between three variables on the chart, these variables are closing price, price spread and volume.

Closing price and price spread are both important variables and highly analyzed by technical analyst but volume are often view as isolation. However, in VSA system, volume is viewed as footprints of professional traders or smart money that are responsible for causing market movements. Therefore, volume, price spread and closing price are analyzed as a whole in VSA, whereby actions of professional traders and smart money can be well predicted and hence trained VSA traders/investors will be able to take advantage of this valuable information to ride the uptrend and downtrend of the stocks movements.

Watch out for next article in this series of education articles brought to you by iVSAChart, Series A: Understand The Basic’s Article 5 - “Who are Richard Wyckoff and Tom Williams?”

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This article only serves as reference information and does not constitute a buy or sell call. Conduct your own research and assessment before deciding to buy or sell any stock. If you decide to buy or sell any stock, you are responsible for your own decision and associated risks.