How to Trade in Harmony with "The Smart Money"

Some Background Information:

Volume Spread Analysis - The Way to Track Markets undergoing Manipulation by "The Composite Operator" or "Smart Money".


An Introduction to Volume Spread Analysis

This is a brief explanation of the underlying methodology of Volume Spread Analysis. We will be showing examples of how professional activity is clearly visible in all markets and in all timeframes, if you know what you are looking for.
Volume Spread Analysis (VSA) is a proprietary market analysis method which was conceived by Tom Williams.

VSA is used to analyze any liquid market by observing the interrelationship between volume, price and spread of the price bar(often known as the range of a price bar).
This method is particularly good at highlighting imbalances of supply and demand.
Despite the fact that few retail traders and investors are aware of this analysis method this is not a new concept, and Tom Williams, who invented VSA was once himself a professional syndicate trader who could see that the markets were being manipulated and that the key to unlocking the truth lay in the relationship between the volume, the range or spread of the bar and the closing price. Tom 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 Pheonix. Richard D Wyckoff (born November 2, 1873; died March 19, 1934) was a stock market authority, founder and onetime editor of the Magazine of Wall Street (founding it in 1907), and editor of Stock Market Technique.

Wyckoff implemented his methods in the financial markets, and grew his account such that he eventually owned nine and a half acres and a mansion next door to the General Motors Industrialist, Alfred Sloane Estate, in Great Neck, New York (Hamptons).
As Wyckoff became wealthier, he also became altruistic about the public's Wall Street experience. He turned his attention and passion to education, teaching, and in publishing exposés such as "Bucket Shops and How to Avoid Them", which were run in New York's The Saturday Evening Post starting in 1922.

Continuing as a trader and educator in the stock, commodity and bond markets throughout the early 1900s, Wyckoff was curious about the logic behind market action. Through conversations, interviews and research of the successful traders of his time, Wyckoff augmented and documented the methodology he traded and taught. Wyckoff worked with and studied them all, himself, Jesse Livermore, E. H. Harriman, James R.Keene, Otto Kahn, J.P. Morgan, and many other large operators of the day.

Wyckoff's research claimed many common characteristics among the greatest winning stocks and market campaigners of the time. He analyzed these market operators and their operations, and determined where risk and reward were optimal for trading. He emphasized the placement of stop-losses at all times, the importance of controlling the risk of any particular trade, and he demonstrated techniques used to campaign within the large trend (bullish and bearish). The Wyckoff technique may provide some insight as to how and why professional interests buy and sell securities, while evolving and scaling their market campaigns with concepts such as the "Composite Operator".

Wyckoff was thorough in his analysis of the trading range. One tool that Wyckoff provides is the concept of the "Composite Operator." Simply, Wyckoff felt that an experienced judge of the market should regard the whole story that appears on the tape as though it were the expression of a single mind. He felt that it was an important psychological and tactical advantage to stay in harmony with this omnipotent player. By striving to follow his foot prints, Wyckoff felt we are better prepared to grow our portfolios and net-worth.
"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".

For more about Richard Wyckoff, see these books:
How I Trade and Invest in Stocks and Bonds by Richard D Wyckoff
Stock Market Technique, No. 2 by Richard D Wyckoff

Tom came back from Beverley hills in the early 1980’s and began to investigate if it was possible to computerize the system he had learnt 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. (www.tradeguider.com)

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".
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 that 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 is the FOREX markets because it is unavailable, but this is a misconception.

Some technical indicators attempt to combine volume and price movements together. Rest assured that 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.

In this Blogg I am going to show YOU exactly what is going on, and to start with, I am uploading a video that was made available on You Tube 5 weeks ago (This Blogg started August 19th 2008). In June and July we were hearing about $200 a barrel of Oil and a weakening Dollar, but as I post Oil has dropped from $148.00 to $114.00 today and You can now get 1.86 Dollars to the Pound, a very different picture painted by the NEWS MEDIA and ANALYSTS who are apprantely "In the know"

I hope I can help you and if you found this blogg your journey to profits begins here.

Good Trading,

Gavin