In an interesting session as a part of the highly popular Face2Face series, conducted by Elearnmarkets, Mr Vivek Bajaj, Co-founder of Elearnmarkets, invited Mr Karthik Ramachandan, a successful stock market investor with many years of experience, to decode the Advance Volume Analysis of Big Players in Stock Market.
Mr Karthik Ramachandan is an engineer passionate about Technical Analysis and practising for more than 15 years. He is also a keen practitioner of Volume Spread Analysis (VSA).
He provided the first free VSA application on the Amibroker charting platform, which was ported to many other platforms, including a few commercial ones and now on Trading view.
In this blog, we will discuss about the behaviour and pattern of trading of the big bulls of the market. In addition, in this blog, we will discuss advanced volume analyses used by the big players in the financial sector.
What is Volume Spread Analysis?
Volume Spread Analysis/Volume Threat Analysis/VPA attempts to read the action of the smart money or the strong hands by reading the price action with three parameters: the close of the price, the spread, and the volume.
The basic premise for this Volume Spread Analysis is that the market is being manipulated by smart money it was in the early 1940s Richard Wyckoff, promoted this idea.
He called it, of course, the smart money as a composite man, so he says that they are sitting behind and manipulating the market to your disadvantage, but if you understand how we place it, you can take advantage of that.
We are trying to do this here, and we are trying to understand the smart money more and follow them, so you know it’s like swimming with the sharks.
So, when smart money makes money so we can, that is the basic idea behind the volume spread analysis.
There are four phases of manipulation:
- Mark Down
Let us look at the practical application of volume spread analysis:
Practical Application of Volume Spread Analysis
Before we go into the practical applications, let’s look at some assumptions or the definitions that will help our analysis.
- Spread- This is the difference between high and low.
- Average Volume- We take an average of the spread for the last 60 days, and that will be our average spread and any spread which is more than 1.5 per cent 1.5 times of the average we call high and which is less than 0.7 of the average we call it low or small spread.
- Up/Mid/Down Close– We need to see where the closes now- up close is it is closing in the upper side near the high we say it up close, and if it is in the middle, then we call it the mid close and if it is in the lower side, we call it the down close.
- Buying/Selling Pressure: In the particular bar, we take the high minus close as the selling pressure and the close minus low as the buying pressure.
Trade Example-Sign of Weakness
Various types of bars show us weakness in the index or a particular stock:
The UpThurst bar is a wide widespread bar; the close is always at the low or near them, and the volume will be high, which normally happens after an upboard or moving into new territory.
It mostly happens after a widespread volume. So let us discuss real-life situations. So let us go to the trading view, where he will show us his software script, which is called VPA 5 point.
Anybody can search that VPA five-point and a supporting VPA volume. So you can plot these two, and this has got all the necessary information we need.
We need information about the close of the bar right and the high or low volume. This volume and the spread, whether the spread is above average high or low, all this information, so we get here and also he has added some on the trend whether it is a major trend, a minor trend, or any intermediate trend.
You can change the background and show what is called a trend band. This trend information is already available here, so this is redundant. There’s a strength band here; this shows the strength of the bar.
You see, the red one is bearishness or weakness, and you can say the green is strength, and the blue is to be a transition.
The same applies to the bars between these two strengths and weaknesses. Finally, you can add three EMAs that show you a lot of information on whether it is an uptrend or weakening.
This is a Upthtust bar, it opened here, moved up to the high here and then came down, and it closed in the low, and you have a very high volume. So this is a typical Upthrust bar where you know when it’s. You had a very wide up bar here, so people feel it is bullish, so the next bar opens higher than the previous one.
Many retail people get in here, so you know the fear of missing out happens and then also this they think it’s a big breakout happening so everybody gets in here and then the is marked down, and it closes below so this is a typical Upthrust bar.
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It gapped up, and then it closed down here, so this is like right from the beginning, a lot of selling has been happening, but if you look at intraday.
Maybe the selling happened much later to bring the price down when many people have gotten it, so this is like trapping.
You can watch the entire Face2Face video here
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