Volume Spread Analysis Explained
Volume Spread Analysis (VSA) is one of the most important concepts in technical analysis. It was explained by Dr. Alexander Elder, one of the leading developers of technical trading tools and the author of several best-selling financial books. Two of his most successful books are Trading for a Living and Come Into My Trading Room. It helps to understand Volume Indicator for Candlesticks.
The consensus across his writing is that volume plays a very important role for traders. It’s one of the market’s key drivers, since price is largely moved by fear and greed among participants. Volume also matters for confirming trend direction and chart patterns.
In this article, we’ll look at the five main concepts of Volume Spread Analysis.
What Is Volume Spread Analysis?
Volume is the amount of an asset traded within a given period. For example, if 10,000 shares of Apple stock are bought and sold on a given day, that number is the volume. If volume drops to 8,000 shares the next day, you can say volume has fallen.
Volume spread, on the other hand, is the difference between two things. In forex, the common definition of spread is the difference between a pair’s bid and ask price. For example, if AUD/CAD has a bid of 0.91420 and an ask of 0.92426, the spread is about 20. There are many other examples of spread — for instance, if Brent crude is trading at $85 and WTI crude is trading at $80, the spread is $5.
Volume Spread Analysis is a method that looks at candlesticks and the volume behind each candle to gauge price direction. It looks at the volume for each candle, the spread of its range, and its closing price.
These are the stages the market moves through in each cycle:
How to Identify Volume Spread Analysis (VSA)
There are several steps to follow when analyzing volume spread.
First, make sure you’re using Japanese candlesticks. VSA doesn’t work well on other chart types, such as line charts, bar charts, or Renko charts.
Second, make sure your broker provides reliable volume data.
Finally, pay close attention to the chart’s timeframe. In most cases, analyzing volume on a very short timeframe, such as a one-minute chart, isn’t useful. We recommend using the daily, weekly, or monthly chart.
You should look at the spread between price bars and volume bars to read the direction.
Two Possible Outcomes After Volume Spread Analysis (VSA):
If volume represents SELLING, why would the spread be narrow? There are only two possible explanations for a narrow spread on a very high-volume DOWN day.
- Either money is being bought into the selling at the end of a downtrend — there’s a trading range to the left, and liquidity is ready to absorb buying from traders around a support zone.
- Or it’s a trend reversal. If the price holds on a retest — particularly on low volume with a narrow downward spread in the same zone where you first saw the unusually high volume — that combination is generally read as a strong buy signal, though, as with any VSA signal, it doesn’t guarantee that price will actually reverse.
Read also: What is the Volume Indicator?
Disclaimer: This article is for educational purposes only and is not investment advice. Volume Spread Analysis is a technical-analysis tool, not a guarantee of future price movement — always confirm signals with your own research before trading. CFDs and forex trading carry a high level of risk and may not be suitable for all investors; you can lose more than your initial deposit. Any links to third-party brokers or services on this page may be affiliate links, meaning Easy Trade may earn a commission if you sign up through them, at no extra cost to you.
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