VSA is an improvement upon the teachings of Richard D. Wyckoff, who began stock trading in 1888 at the age of 15. In the 1910s, Wyckoff published his weekly forecasts which were read by over 200,000 subscribers. His mail-order courses are still available today. Moreover, the Wyckoff method is offered as part of the curriculum at Golden Gate University in San Francisco. Wyckoff was at odds with market analysts whose trading was based on chart formations.
Tom Williams, a former professional stock market trader in the 60s and 70s improved upon the work that Wyckoff started. Williams was in a unique situation that allowed him to develop his own methodology. His research has been available since the 1993 publication of his “Master the Markets” book. VSA can be used in all markets and with different timeframes, the trader just needs a volume histogram in his price charts. In some markets like the stock market or the futures market, actual transaction volumes are available, yet in other markets – like forex which isn’t centralised – actual volume numbers are not available. However, this doesn’t mean that a trader can’t analyse foreign exchange market volumes, he must simply analyse the volume observed on each tick.
Forex volume can be represented by the amount of activity observed in each bar or candlestick. One must keep in mind that the big professional traders are heavily involved if there is a lot of activity on a candlestick. Conversely, a low level of activity means that professional traders are abstaining from the movement. Each scenario can have implications on the balance of supply and demand, thereby helping the trader identify a probable direction of the market in the short to medium term. What is an analysis of volume differences? VSA looks for differences between supply and demand that are primarily created by the major forex players: professional traders, institutions, banks and market makers.
The transactions of these professional traders are plainly visible on a chart, assuming that you’re a forex trader who knows how to read them. The meaning and the importance of volume seems to be poorly understood by most novice traders, yet it is a very important component when conducting technical analysis of a chart. A price chart without volume is like a car without a fuel tank. The volume always indicates the transaction amounts and the price range shows the movement in relation to this volume. Nevertheless, a bull market can exist with either high or low volumes, prices can move in a horizontal range or even fall with an identical volume! This suggests that there are other factors to be considered when looking at a chart.
Each market moves based on the supply and demand created by professional players. If there is more buying than selling, then the market goes up. If there is more selling than buying, the market goes down. In practice, financial markets are not so easy to read, there is also plenty of information to consider when looking at a history of prices.
This important concept is often overlooked by most non-professional traders. Most traders are completely unaware that substantial buying can occur at lower price levels during the accumulation phase. This buying by professional players actually appears on a chart as a bearish candlestick with a volume spike. VSA teaches that the power of a market is shown in a bearish candlestick, and vice versa, the weakness of a market is shown in a bullish candlestick. This is exactly the opposite of what most traders think! This kind of activity has been going on for over 100 years, yet most novice traders have not heard about it until now. Let us now look at a clear example of distribution which shows the massive sale by professional traders during a rising market.