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Derivatives and Wyckoff VSA

Posted by Tradeguider Team on Wednesday, May 26, 2021
Tradeguider Team

Want to benefit from Wyckoff VSA in the derivatives market? The core principle of tracking the professional or smart money applies as much here as when trading any market.  

It turns out that SMART Technology and automated alerts helps mitigate risk and reduce heavy lifting here too. Read on for a breakdown of how to make this part of your Wyckoff-VSA powered portfolio as well as reasons for trading in derivatives in general.



What are derivatives and why do people trade them?

Derivatives are a contract between two parties that bet on the changing price of an underlying asset. Neither party owns the asset itself.  

Covering many asset classes – commodities, stocks, indices, currencies, bonds - they can be bought via a broker in standard contracts or as over-the counter non-standard contracts. Futures contracts, options, CFDs and spread betting all fall into this category. You also have forward contracts and swaps such as interest rate swaps, commodity swaps, and currency swaps.

The concept originates from business sectors that prefer to lock in the future cost of the commodities they depend on (such as animal feed in agriculture, oil in aviation).

They allow traders to leverage, that is amplify their trading position beyond that that would be possible from the trader’s cash balance, so you can see a big reward from a small amount of money. With stocks you might need an account size of £10,000 but you can access the micro e-mini futures  with £500 or £1,000.

There are also new crypto derivatives, like the Micro Bitcoin futures contract from the CME Group, that enable traders to get involved in the growing Bitcoin market by buying future contracts for a tenth of one bitcoin (versus the standard contract size of 5 bitcoins), but with a smaller capital outlay and less exposure to risk.

Being a derivatives trader is more complicated than being a cash trader and will test your maths skills. Meanwhile for the professionals it`s all about coding. 


How to trade derivatives using Wyckoff VSA

As with any other asset class, Wykcoff VSA can help people trading derivatives to improve their profit margins and consistency. All the usual Wyckoff VSA principles and processes apply.

It`s especially important to track smart money movements when trading derivatives given that they provide fertile ground for large institutional traders to hide large orders with iceberg trading.

This is where they split them up into smaller size orders with only some of the orders being visible at any one time to hide their actions. This does depend on the size of the market (bids/offers) and the size to be executed. 

And having computerised chart scanning is particularly helpful in derivatives where there are so many assets to monitor: it helps you scan 1000s of charts over 25 markets in 10 time frames looking for setups according to Wyckoff VSA principles.  This might even include scalpers who want to look at 10 tick charts. 

And then you get alerted to the setups that have a high probability of success at lower risk.

For instance, while we were speaking to Gavin Holmes, Tradeguider CEO, for this blog, his system was scanning 20 different futures contracts in 8 different time frames. “A human being couldn’t do it but a computer can do it very easily”, he said.


Read more about our trading tools here  


But as Gavin reminds us “You can give someone the best tools and they might still screw up. But at least this is a great starting point”, he says.

If you’re in a highly leveraged position, using semi-automated tools means you can manage the trade and get out of loss situations more quickly than you might otherwise.


FOREX or currency futures?

People often ask what the difference is between currency futures trading - a derivative - and the spot FOREX market.

As we discussed in the blog linked below, spot FOREX has traditionally been an unregulated space, though this is changing.

In addition, despite what newbies might think, ‘You are still paying a commission but in a different way and it’s less controllable’, warns Gavin. It’s called a spread and the spread can change very quickly around news events.

In contrast the currency futures market works through regulated exchanges and is not at the whim of the spread as in the spot FOREX market

 ‘In currency futures you get what you’re billed at,’ says Gavin. ‘You know the market price, you pay an upfront commission when you take the trade. You can place an order based on what you see on your screen and get billed at a price from the exchange,’ he says.

But you could still get caught out by leverage going against you.

Both of these classes lend themselves to scalping because it is much cheaper to enter and exit trades in this market than in, for example, stocks.


 Wyckoff VSA can be used for spot FOREX

even though it isn’t a centralized market with volume information provided by the exchanges.

Read this blog for more information



The very thing that makes trading derivatives attractive – leverage – can make them the downfall of a new trader. Just as you can control a large asset with a small amount of capital investment, so you could blow up your account very quickly.

Even though most brokers will intervene if they see a trader doesn’t have enough money in their account to cover a large position that has gone against them, it’s still important to revisit your core trading skills. You need really good trading discipline and risk management to trade in the derivatives market as you do when trading equities or other asset classes.

Here’s a checklist of things to watch for:

1 – Be very good at assessing your risk. What is the maximum downside of a position?

2- Minimise your risk at all times – for example a position may go bad overnight so limit your trade size and diversify your trade so the eggs aren’t all in the same basket.

3 – Be good at money management

4 – Be disciplined and patient

5 – Learn from your mistakes

6 – Trade what you see on the chart and don’t anticipate the future.

7 - Take small losses and make consistent profits

8 – Be disciplined and patient

9 – Learn from your mistakes.

Tradeguider is the home of Wyckoff VSA. Not only do our SMART Technologies enable you to identify high-probability low-risk trade setups, we have pre-set strategies included with our CHART Center and SMART Center products which means all you have to do is follow the sequences laid out for you, and always be working on your mindset skills to increase your chances at taking a profit.  Get in touch if you want to find out more.

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