This is the third in a series of articles looking at some key tools and different practises that can improve your chart reading skills and your trading overall.
Part 3 – Support and Resistance
Previously we talked about volume and its role in chart analysis. Still, there is one more feature of volume that can help traders to avoid critical mistakes as well as find good entries to their trades.
Traditional technical analysis looks at tops, bottoms of the market, channel lines, trend lines, Fibonacci levels etc to identify support or resistance, but does not consider bars with significant volume at all. At the same time the tops, bottoms and sometimes the closes of bars with relatively big volume (called Ultra-High Volume or UHV in Volume Spread Analysis) create very serious support/resistance to the price moves. In many cases the professionals prefer to test areas where Ultra-High Volume has appeared for supply or demand before the price pushes away significantly from there, as its presence may impact price movement and cost them a lot.
To enlarge the image, right-click it to open it in a new tab
Look at the chart for Canadian Dollar futures (CME:6C1!) above. First an Ultra-High Volume bar appears on February 16th 2023 at 15:00 UTC+1 time zone. The top and bottom of this bar (marked by the blue dashed lines) create significant resistance. To push the price above it activity (volume) will be required. Later, on February 17th 2023 at 15:00, another huge volume bar appears showing weakness. The effort on this bar was enough to move the price through the 0.7419 level (the bottom of the previous UHV bar) and seeing the change in the direction of the moving average to the up side, many traders may start to consider long trades around 03:00 on February 20th.
Without looking at volume on the bars, they won’t be able to recognize the level of 0.7439 (the top of the first UHV bar in the picture) as a potential resistance. In fact, the volume diminished there, making it impossible for the price to go higher. Then we can see further selling around UHV tops and bottoms in the 0.7419-0.7439 range of the first UHV bar in the picture on February 21st at 9:00 and at 13:00 .
The bottom of the 14:00 bar on February 21st (0.7392) creates another level of resistance and again, the price respects it drifting around for some time. Any attempts to go above (as on February 22nd at 13:00 or 19:00) have met more professional selling (the bottom of February 17th 15:00 bar).
The VSA methodology teaches us how to identify the movements of the professionals so that we can follow them. From the above example you can see how price acts around the tops and bottoms of UHV bars. This confirms bars with big volume are very important to consider because either the presence or absence of professional activity there may reveal what smart money are planning to do. We can therefore trade accordingly.
The first part of this blog series, which covers volume, can be found here and the second, on multi-timeframe environments, is here, but a lot of these pitfalls are covered in more depth our most recent course: `The Wyckoff VSA Trading School`. A self-paced course, it consists of 12 x 90-minute sessions.
You are at the home of VSA. Our core focus is on helping traders and investors at every stage of their development through a mixture of software, education and trading services. Message us here to find out more.