Main ArticleTrading in the Shadow of the Smart Money
Contributed by Gavin Holmes
Volume Spread Analysis (VSA) is the underlying methodology of the TradeGuider "Smart Money" Tracker. The following examples of how professional activity is clearly visible in all markets and in all time frames, to those trained in VSA.
Volume Spread Analysis (VSA) is a proprietary market analysis method which was conceived by Tom Williams the Chairman of TradeGuider Systems International and former syndicate trader. VSA has its basis on the Richard D. Wyckoff method of analyzing market movement. VSA is utilized in the TradeGuider software to analyze a market by observing the interrelationship between volume, price and spread. This method highlights imbalances between supply and demand.
The TradeGuider "Smart Money" Tracker is unique. Driven by an artificial intelligence engine, this methodology plug in for MetaStock is capable of analyzing any and all liquid markets, in any time frame, and extracting the information it needs to indicate imbalances of supply and demand on a chart. In doing so, TradeGuider is able to graphically show the essential forces that move every market which are supply and demand, cause and effect and effort vs result.
The software works with either real-time or end-of-day modes, and enables users to see when professional money is entering, exiting, or not participating in the market they are trading, empowering clients to make more intelligent, timely, and informed decisions. Volume Spread Analysis (VSA) is a revolutionary concept that can be used on its own or in conjunction with other methods as decision support. The system combines ease of use with unique supply and demand analysis not found anywhere else. The extensive Expert System has an innate understanding of market dynamics combined with volume, which means that it is capable of analyzing supply and demand in any liquid market.
The indicators are displayed automatically on the chart. There is no configuration, no setting of parameters, and no optimization. Tradeguider's belief is that if a system requires optimization to make it work, then the base methodology cannot have been sound in the first place, since the process of optimization is used to cover up a whole range of flaws in the original analysis method(s). Tradeguider concepts are robust and can be applied to any time frame, with consistent results. The sophisticated Expert System is augmented by a novel set of proprietary tools, which ensure that any trader or investor can immediately follow the footsteps of the "Smart Money."
While volume in trading is not a new concept Tom Williams, who invented VSA, was a syndicate trader who could see the markets were manipulated and the key to unlocking the truth was in the relationship between the volume, the range or spread of the bar and the closing price. Tom Williams spent many years studying the concepts of Richard Wyckoff.
Richard Wyckoff was a trader during the 1920 and 30's. He wrote several books on the Market, and eventually set up the "Stock Market Institute" in Phoenix. "At its core, Wyckoff's work is based on the analysis of trading ranges, and determining when stocks are in "basing," "markdown," "distribution," or "markup" phases. Incorporated into these phases are the ongoing shifts between "weak hands" (public ownership) and "composite operators," now commonly known as "Smart Money." To find out more about Richard Wyckoff this website is worth visiting.
Tom returned to the United Kingdom from Beverley Hills in the early 1980's having made his fortune and began to investigate if it were possible to computerize the system he had learned as a syndicate trader, and so began the evolution of Volume Spread Analysis. Together with an experienced computer programmer Tom carefully studied many thousands of charts to recognize the obvious patterns that were left when professional or smart money was active. This methodology although simple in concept took many years to write and is now taught as a methodology combined with the software called TradeGuider.
Volume Spread Analysis seeks to establish the cause of price movements. The 'cause' is quite simply the imbalance between Supply and Demand or strength and weakness in any liquid market, which is created by the activity of professional operators or "Smart Money." If you use the TradeGuider software you will see that it does an excellent job of detecting these key imbalances for you, taking the hard work out of reading the markets and enabling you to fully concentrate on your trading.
The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of technical analysis. To use a chart without volume is similar to buying an automobile without a gasoline tank.
For the correct analysis of volume, one needs to realize the recorded volume information contains only half of the meaning required to arrive at a correct analysis. The other half of the meaning is found in the price spread. Volume always indicates the amount of activity going on, the corresponding price spread shows the price movement on that volume. Many traders believe you cannot analyze volume in the FOREX markets because it is unavailable, but we will show you how TradeGuider proprietary system can achieve something that most traders thought was not possible. More about this later.
Some technical indicators attempt to combine volume and price movements together. Rest assured this approach has limitations, because at times the market will go up on high volume, but can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume! So, there are obviously other factors at work.
Price and volume are intimately linked, and the interrelationship is a complex one, which is the reason TradeGuider "Smart Money" Tracker was developed in the first place. The system is capable of analyzing the markets in real-time (or at the end of the day), and displaying any one of 280 indicators on the screen to show imbalances of supply and demand.
Let's go ahead and look at some charts.
The TradeGuider "Smart Money" Tracker Indicators.
All of the indicators can be grouped into two broad categories: Indicators that show weakness are colored red. Weakness is indicative of supply, professionals selling the market, or professionals withdrawing from the market (i.e. no participation). Strength is indicated by green symbols and is indicative of market demand (i.e. professionals buying into the market or not selling as the market falls).
TradeGuider constantly analyzes your charts for imbalances of supply and demand or strength and weakness as it happens. Once an imbalance is found, a red or green indicator is displayed, alerting you to the likely strength or weakness in the market. This chart (link below) shows a number of green symbols, indicating strength (demand). Showing supply and demand graphically on a chart is one of TradeGuider's major strengths. In the chart below, we can see that following the cumulative effect of a build up of demand, the stock responds with a positive and sustained price rise.
This chart (link below) shows a number of red symbols in a strong short and medium term downtrend, confirmed by the bearish volume thermometer, indicating weakness (supply). The market falls because of the lack of interest from professionals as the price rises. We call this "No Demand." In a downtrend this is a great shorting opportunity. Here is an example of a TradeGuider chart in MetaStock 12.
Because TradeGuider works in FOREX, Stocks, Futures and Commodities, the actual markets we analyze for this document are irrelevant.
Now let's look at some specific Volume Spread Analysis indications of demand. (strength) Climactic Action, is another indicator variant that shows when buying is overcoming selling. A high volume down move, on a wide spread would normally indicate selling. However, if the next bar closes higher, closing on or near the top of the bar, then this shows that buying occurred on the previous bar. Only professional money can do this and it is therefore a good indication of strength.
Notice on this chart the ultra high volume activity on a down bar with the price close in the middle of the bar. This can only mean professionals are buying the market otherwise the close would have been at, or near, its low. The concept of climactic action, as with most VSA indicators, has different variations. By using the TradeGuider "Smart Money" tracker you will be alerted automatically to all variations as they appear, accelerating your learning curve. The next chart we'll look at will demonstrate what a test looks like. Tests, by their very name, are the professionals testing the amount of supply present in the market. When they test and there is low volume this clearly shows no residual supply and the market is likely to rise in the near future.
Now for an explanation of how TradeGuider can analyze FOREX charts to determine strength and weakness in both spot FOREX and Currency Futures.
It is important to understand that TradeGuider does not need actual volume but relative volume compared to the previous bar to give a VSA indicator. Volume in FOREX can be seen as activity, and it is this activity that TradeGuider picks up extremely well when using MetaStock.
Here is an explanation from Tom Williams, the creator of TradeGuider.
Q: How does the Tradeguider VSA principles work in Spot FOREX?
A: First of all you have to realize that the "Smart Money," or "Professional Money" is very active in the FOREX market. "Professional Money" as we shall refer to it here, can be trading syndicates, individual traders with huge capital, large financial institutions, certain funds such as 'The Quantum Fund operated by George Soros, and large institutional banks.
See further information in this letter from The Derivatives Study Center sent to The Commodity Futures Trading Commission in August 2000 by clicking here.
These individuals or organizations are very secretive in their dealings, as it is crucially important to keep their actions as invisible as possible.
Fortunately tick volume does work. Tick volume is added to the price movement on every price tick up or down, because one may deal in 5M while the very next trader only deals 500k, but we get one tick each dealer. Bear in mind the number one principle, that from the tick volume created, 90% will be from "Professional Money" and their dealers.
When these very large orders go through, they have a following, the same as the futures pits; this automatically creates more ticks, hence higher volume. So TradeGuider will analyze the tick volume as if it were real volume, and will clearly show this "Professional Money" either participating or just as importantly not participating in the movement of a currency. When we hear of strength and weakness in a currency, this is nothing more than professional support or lack of it, and can be clearly seen on the TradeGuider Chart.
Remember when in 1992 George Soros massively shorted the British Pound forcing the Bank Of England to eventually withdraw from the European Exchange Rate Mechanism, well, this is one very well known example of "Professional Money" having a dramatic effect on a currency. This happens every day, you just need to know what to look for. Check out this chart and see what the volume did in that famous move by George Soros:
Here's a famous example...
British Government no match for George Soros
In 1992 the British pound fell so sharply that Britain was forced to leave the Exchange Rate Mechanism (ERM). What do you think was behind this famous fall? Yes, you guessed it, professional money! The money in question was the Quantum Fund, run by the renowned speculator George Soros.
He and his analysts had spotted a potential weakness in the ERM. During the weeks before the massive sell-off of the British pound, George Soros was busy exchanging seven billion US dollars for German Deutschemarks.
When the time was right he moved in fast, selling the British pound. As the pound fell the Deutschemark rose, creating huge profits for Soros. As soon as the news broke the other professionals followed suit. The onslaught was overwhelming and too much for Norman Lamont, the then UK Chancellor of the Exchequer.
In an attempt to halt the slide Lamont resorted to selling some of Britain's gold reserves, he put up interest rates three times during one day, but this was still no match for the professionals.
The following is taken from the first 19 pages of the highly acclaimed book by Tom Williams – "Master the Markets." Here is some more information about this book. It WILL change the way you view the markets, so please take a moment to view these first few pages. The complete book has over 185 pages and the MetaStock "Smart Money" tracker software comes with a multimedia home study course that brings the book and plug in to life.
ALL MARKETS ARE DOMINATED BY THE BIG PROFESSIONAL PLAYERS
The banks, institutions and the specialists have all the financial resources to move prices up or down. Trillions of dollars are exchanged daily across the world's stock, currency and commodity markets. Hundreds of millions are spent analysing crop reports, business sectors and economic figures.
All other activity, including the combined trades of thousands of individuals like you and me, represents only a tiny fraction of the money and resources flowing in and out of the market on a daily basis.
You may think that's pretty obvious. But...
Markets don't react to professional activity the way you expect them to.
In every market, there's an undeclared understanding amongst professional traders. It alerts them to what the big money is doing. It's based around observations surrounding volume activity and the effect this has on the price and the spread.
To us outside observers this activity normally goes unnoticed - an insignificant and unexplainable blip lost amongst the 'noise' of the markets.
If you've ever watched the Dow or a stock price over any period of time, you'll know that prices can fluctuate wildly. But there is logic behind all this chaos and the professionals know exactly how to profit from it.
They know what the signals mean, yet only a tiny minority of non-professionals know what's really going on.
By using the MetaStock "Smart Money" tracker, you could be one of the trading elite...
As you'll see in graphic detail later, knowing how to read the market will allow you to take the professional's lead and boost your profits.
Understanding professional moves will allow you to uncover the true market sentiment. It will give you a clear indication of which markets you should hold positions in - whether buying or selling stocks, or going long or short on futures.
There's No Way To Hide...
You see, no matter what they do, the professionals can never hide their true intentions. They may be leading the market, but they leave tell-tale signs for anyone with the right knowledge to follow.
It doesn't take a great leap of logic to see how you could use this information to your advantage...
Ultimately it means that all other factors - including the fundamentals of a company, the management, the strength of the dollar and interest rates, simply aren't important in your analysis. Ditto for newspaper financial columns, investment journals, broker recommendations and television coverage.
The only truly important consideration for you is what the professional money is doing - that is the only thing that matters.
*** To see recent MetaStock chart examples of the specific market you trade and receive The Complete Volume Spread Analysis System Explained ebook at no cost just email email@example.com and provide a contact number and we will be happy to assist you and answer any questions you may have.
About Gavin Holmes
Gavin has helped thousands of traders in over 36 countries learn how to track the "Smart Money" and avoid the tricks the "Smart Money" play. Gavin was taught to trade by veteran syndicate trader, Tom Williams, (now 78), and was fortunate enough never to have picked up the bad habits many retail traders suffer from.
Gavin is now based in Chicago in the US and regularly hosts seminars and events sharing his experience and knowledge developed through talking to hundreds of retail traders each month, most who are finding the markets a challenging environment..