Volume Spread Analysis Definitions

Abbreviation for Volume Spread Analysis

An assumption that stock market investors are divided into Smart Money and Dumb Money. Smart Money is an investor (group of investors) who never loses bet on the market and who has enough funds to reverse a price trend in certain direction. Smart Money can create a shortage either in Supply or in Demand and they can manipulate the price movements. The VSA's goal is to spot the activity of Smart Money in order to join them in winning trading.

It is important to understand that Smart Money is not any particular group of institutional investors who just have big bags of cash. In reality any institutional investor sometimes wins and sometimes loses. When institutional investors are wining, they are Smart Money and we have to spot their activity. When they lose, they are Dumb Money and we have to spot actions of other institutional trader who they lost to.

The role of the VSA is to find a wining side (find Smart Money) and trade along them.

By assuming that we have Smart Money on the stock market, we also acknowledge the existence of the Dumb Money (in some references named as crowd). Dumb Money are investors who never had and who never will have a winning trade. They buy at high from the Smart Money and they sell at low to the Smart Money. Dumb Money have no enough funds to affect a price trend.

Supply is a quantity of a commodity available for selling by Bearish investors at specific price.

Demand is also referred to as Bullish pressure is a quantity of a commodity (stocks) wanted by Bullish investors at specific price.

Supply/Demand Balance is a balance between a quantity of a commodity available for selling and a quantity of the same commodity wanted to be bought.

Supply/Demand Balance is positive (Bullish) when Demand (Bullish pressure) is higher than Supply (Bearish Pressure). Shortage in Supply pushes the Bullish trader to raise price in order to buy.

Supply/Demand balance is negative (Bearish) when Supply (Bearish pressure) is stronger than Demand (Bullish pressure). Shortage in Demand makes the bearish traders to drop price down in order to sell.

Accumulation is a period in the lower side of price trend cycle. It covers the end of a down-trend, support (lowest price) and the beginning of an up-trend. During the Accumulation phase, Smart Money Accumulate (buy) theirs investments from the Dumb Money

Distribution is a period in the upper side of price trend cycle. It covers the end of an up-trend, resistance (highest price) and the beginning of a down trend. During the Distribution phase, Smart Money distribute (sell) theirs investments to the Dumb Money

Mark Up is a phase in a price cycle when price exits an Accumulation phase and it moves up until it reaches the point when Distribution phase starts. In simple words, it is an up-trend.

Mark Up is a phase in a price cycle when price exits a Distribution phase and it moves down until it reaches the point when Accumulation phase starts. In simple words, it is a down-trend.

Overbought is a condition when in the result of heavy buying, the Demand is dried out. It does not guarantee we will have a reversal down. This is just a condition when price is predisposed to reverse down - when small increase in Supply (small increase in Bearish pressure) may reverse a price trend.

Over-evaluated stock is a stock that is traded on the market at price which is higher than the real value of a company. Real (actual), intrinsic value of a stock could be calculated in various ways by making assumptions about future company grows, EPS, risk and etc. Each fundamental analyst evaluates a stock by making his/her own assumptions and the result may greatly differ.

Overpriced stock does not mean that this stock is doomed to decline. With time, as new estimation take place, an overpriced stock can turn into an underpriced. Also, overpriced stock may continue to be pumped up.

Oversold is a condition when in the result of heavy selling, the Supply dries out. It does not guarantee we will see a reversal up. This is just a condition when a small increase in Demand (small increase in Bullish pressure) may reverse a price trend up.

Under-evaluated stock is a stock traded on the market at price much lover than the actual value of a company. The same as with overpriced stocks, a stock's real value (intrinsic value) could be calculated in different ways and it could be based on different assumptions about risk and future grows.

The same as in case with overpriced stocks, underpriced stocks are not guaranteed to rally up. With time, when new data are released (earning reports), previously underpriced stock could become overpriced. Also, investors may continue to dump (sell short) these stocks.

Underpriced stock have higher price growth potential when compared to overpriced stocks.

Spread is the difference between High and Low prices over specified time-frame (price bar).

Up-Bar is a price bar with close price above previous bar's close.

Down-Bar is a price bar with close price below previous bar's close.

WRB is a price bar where Spread (difference between high and low) is big - at least 1.8 times bigger than the average spread in the past (30-50 bars).

NRB is a price bar with narrow Spread - where Spread is at least 0.8 times smaller than the average spread over the past (30-50 bars).

Up Close Bar is a price bar where close price is close to the bar's High price - when you look at a WRB it should be within 30% from High.

Down Close Bar is a price bar where close price is close to the bar's Low price - when you look at a WRB it should be within 30% from Low.

Middle Close Bar is a price bar with closing price in the middle of a bar.

High volume is volume that is higher than the average trading volume and ultra high volume is actually a strong volume spike which is much higher than what would you consider as a high volume.

It is difficult to set a specific numbers and tell that when you see volume which is 2 times higher than the average volume over the past 30 bars then this is high volume. For the S&P 500 index 1.3-time increase in volume could be considered as a high volume and 2-time increase as ultra high volume. At the same time, for the MSFT stock 2 times increase in volume could be considered as high volume and 3-time increase in volume as ultra high volume.

The easiest way is to scroll charts back in history and estimate what increase in volume would be considered as high volume and what increase would be considered as ultra high volume.