What is bullish and bearish volume? That is simple, bullish volume is increasing volume on up-moves and decreasing volume on down-moves. Bearish volume is increasing volume on down-moves and decreasing volume on up-moves.
This is a start but it’s not enough for investors to be successful in trading. You need to know more than this, like looking at the price spread and price action in relation to the volume.
Other indicators focus on a particular area of a chart rather than a trading point. They use averaging techniques to smooth out the noisy data. The smoothing of the data diminishes the importance of variation in the data flow and hides the true relationship between volume and price action, rather than highlighting it.
Using volume spread analysis created by TradeGuider, allows a trader to monitor what is activity and it’s displayed as a separate indicator known as the volume thermometer. The accuracy of this indicator will leave traders in no doubt that volume is either increasing on up-bars or decreasing volume on down-bars.
The Charts Tell a Story
The market is an ongoing story, unfolding bar by bar and traders must have an overall view of the market and not concentrate on individual bars. The reason why we say this is because smart money may want to trap you into thinking that the market is going to go up when they have finished distributing, otherwise known as selling. Near the end of the distribution, traders are most likely to witness an up-thrust. This price bar on its own means nothing, but to an educated VSA investor, they’ll know that there is distribution in the background and this bar is a severe sign of weakness and is a perfect opportunity to take a short trade.
It’s very important to remember that looking at the background, and the previous bars is more important than just looking at the current price action. The current pricing action is heavily influenced by what is happening in the background. Is there strength or weakness? By studying the background, traders will understand why the market is behaving as it is today.
One rule that I want you to take away from the blog post is the following:
If the market is being artificially marked up, this will be due to weakness in the background. If prices are being artificially marked down, it will be due to strength in the background.Tom Williams
If prices are dropping on volume that is less than the previous two bars, especially if spreads are narrow, with the price of the bar closing in the middle or high of the bar, this indicates there is no selling pressure.
Weakness manifests itself on up-bars, especially when spreads are narrow, with volume less than the previous two bars. This shows there is no demand from professional traders.