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Volume spread analysis (VSA) is a form of technical analysis which attempts to look into price action in relation to volume. VSA is the study of the market forces of supply and demand and the manipulation of those forces through examining the relationship between the quantity of volume on a price bar, the spread of the price or range of the bar, and the closing price on the height of that bar. Studying these variables allows users to decipher the state of balance between supply and demand for the underlying security, as well as the likely near term direction of the market.
VSA is the result of Tom Williams experience and discoveries applied to Richard Wyckoff's methods. Williams describes volume as "the major indicator" for institutional traders as it largely represents professional activity. Richard Wyckoff's Methods are based on his extensive experience and studies which rely heavily on Jesse Livermore's (The Reminiscences of A Stock Operator) discoveries. These three traders came to understand the underlying mechanics of the markets and developed methods to trade them and, later, to teach others how to trade effectively.
Jesse Livermore detailed how the markets are manipulated by professional traders and developed methods to profit from this dynamic. Richard Wyckoff codified Livermore's discoveries and methods and applied them to chart reading. Tom Williams added VSA to Wyckoff's work to reveal the specific tactics used to manipulate crowd behavior and expose the footprints of the "smart money" composite operators.
VSA is a quantitative study of price action and uses three components on the chart to determine the balance of supply and demand as well as the probable near term direction of the market. These components are the amount of volume affecting the price, the price spread or range of the price (not the bid/ask spread), and where price closes. VSA analyses volume and price action relative to the preceding bars on a chart to identify accumulation or distribution phases, which suggest future direction of price.