We can learn a great deal from observing the professional market operators. If you watch a top professional trading and he is not on the floor, he will most likely be looking at a trading screen, or a live chart on a computer screen. On the face of it, his resources are no different from any other
trader. However, he does have information on the screen you are not privileged to see. He knows where all the stops are, he knows who the large traders are and whether they are buying or selling. He has low dealing costs compared to you. He is well practised in the art of trading and money management.
What does he see? How does he manage to get a good position when, by the time you get to the market, prices always seem to be against your interests? How does such a trader know when the market is going to move up or down? Well, he understands the market and uses his knowledge of volume and price action as his primary cues to enter (or exit) the market.
His primary concern is the state of supply and demand of those instruments in which he has an interest. One way or another, the answers lie in some form of analysis of trading volume, price action and price spreads. Here at TradeGuider Systems Ltd, we have developed a methodology called Volume Spread Analysis (abbreviated to VSA), which has been built into the computer model that is utilised in the TradeGuider software.
Learning which questions to ask and how to obtain the answers requires us to look more deeply into the markets. The stock market becomes far more interesting if you have some idea what is going on and what is causing it to go up or down. A completely new and exciting world can open up for you.
Nearly all traders use computers and many of these traders are using Technical Analysis packages.
They will have learned how to use well-known indicators, like RSI and Stochastics, which are mathematical formulae based on a historical study of price. Some packages have over 100 indicators and other tools that measure cycles, angles, or retracements. There is even software that analyses the effects of tidal forces, astrological, planetary, and galactic influences. To many traders, these methods will have a place in their trading decisions, because they will be familiar with their use. However, it can become a very frustrating business being placed outside of the market looking in, using these tools, trying to decide if the market is likely to go up or down.
The fact is, these tools never tell you why the market is moving either up or down – that, in most cases remains a complete mystery. People, unless they are naturally well disciplined, are extremely open to suggestion! Folks like to be given tips, listen to the news stories, seek out rumours in internet chat rooms, or maybe subscribe to secret information leaked from unknown sources.
For the most part, professional floor traders, syndicate traders, and the specialists, do not look at these
things. They simply do not have the time. Professionals have to act swiftly, as soon as market conditions change, because they are up against other professionals who will act immediately against their interests if they are too slow in reacting to the market. The only way they can respond that fast is to understand and react, almost instinctively, to what the market is telling them. They read the market through volume and its relationship to price action. You, too, can read the market just as effectively, but you have to know what you are looking at, and what you are looking for.
The Basics of Market Reading
Before you can start your analysis, you will need to see all the relevant price action, going back over the past few months. We recommend using the Trade Guider software, by Trade Guider Systems Ltd
(www.TradeGuider.com), since using this software will give you a significant advantage over standard charting software, as you will also be able to see our proprietary VSA indicators. There are around 400 indicators built into Trade Guider, which utilize all the introductory principles in this brief book, plus the many other advanced VSA indicators that we have developed and researched over the course of the last 15 years.
Volume is usually shown as a histogram on the bottom of the chart. We recommend that you don’t use the open interest volume, since this can be misleading. However, for real-time charts, tick volume may be used where no transaction volume is available.
At this point, it is important to note that volume gives us an indication of the amount of activity that has taken place during whichever time frame is being monitored.
All markets move in ‘phases’; we can observe the market building a cause for the next move. These phases vary – some last only a few days, some several weeks. The longer phases give rise to large moves, and the shorter phases result in smaller moves.
The amount of volume taken in isolation means little – it is the relative volume we are interested in. The chart below shows the relative volume indicator that is unique to Trade Guider. It is showing that there is considerably more bearish volume in the market, which is why the prices decline on this chart. Once you have established the relative volume of business, you must consider how the market responds to this activity.
The spread is the range from the high to the low of the price bar. We are particularly interested in whether the spread is abnormally wide, narrow, or just average. The Trade Guider software interprets the spread size, and all other relevant information for you, so there is no need to establish anything by eye (which can be difficult at times). The graphic below shows how Trade Guider reports all the required information with easily comprehensible English words, rather than arbitrary numerical values.
trader. However, he does have information on the screen you are not privileged to see. He knows where all the stops are, he knows who the large traders are and whether they are buying or selling. He has low dealing costs compared to you. He is well practised in the art of trading and money management.
What does he see? How does he manage to get a good position when, by the time you get to the market, prices always seem to be against your interests? How does such a trader know when the market is going to move up or down? Well, he understands the market and uses his knowledge of volume and price action as his primary cues to enter (or exit) the market.
His primary concern is the state of supply and demand of those instruments in which he has an interest. One way or another, the answers lie in some form of analysis of trading volume, price action and price spreads. Here at TradeGuider Systems Ltd, we have developed a methodology called Volume Spread Analysis (abbreviated to VSA), which has been built into the computer model that is utilised in the TradeGuider software.
Learning which questions to ask and how to obtain the answers requires us to look more deeply into the markets. The stock market becomes far more interesting if you have some idea what is going on and what is causing it to go up or down. A completely new and exciting world can open up for you.
Nearly all traders use computers and many of these traders are using Technical Analysis packages.
They will have learned how to use well-known indicators, like RSI and Stochastics, which are mathematical formulae based on a historical study of price. Some packages have over 100 indicators and other tools that measure cycles, angles, or retracements. There is even software that analyses the effects of tidal forces, astrological, planetary, and galactic influences. To many traders, these methods will have a place in their trading decisions, because they will be familiar with their use. However, it can become a very frustrating business being placed outside of the market looking in, using these tools, trying to decide if the market is likely to go up or down.
The fact is, these tools never tell you why the market is moving either up or down – that, in most cases remains a complete mystery. People, unless they are naturally well disciplined, are extremely open to suggestion! Folks like to be given tips, listen to the news stories, seek out rumours in internet chat rooms, or maybe subscribe to secret information leaked from unknown sources.
For the most part, professional floor traders, syndicate traders, and the specialists, do not look at these
things. They simply do not have the time. Professionals have to act swiftly, as soon as market conditions change, because they are up against other professionals who will act immediately against their interests if they are too slow in reacting to the market. The only way they can respond that fast is to understand and react, almost instinctively, to what the market is telling them. They read the market through volume and its relationship to price action. You, too, can read the market just as effectively, but you have to know what you are looking at, and what you are looking for.
The Basics of Market Reading
Before you can start your analysis, you will need to see all the relevant price action, going back over the past few months. We recommend using the Trade Guider software, by Trade Guider Systems Ltd
(www.TradeGuider.com), since using this software will give you a significant advantage over standard charting software, as you will also be able to see our proprietary VSA indicators. There are around 400 indicators built into Trade Guider, which utilize all the introductory principles in this brief book, plus the many other advanced VSA indicators that we have developed and researched over the course of the last 15 years.
Volume is usually shown as a histogram on the bottom of the chart. We recommend that you don’t use the open interest volume, since this can be misleading. However, for real-time charts, tick volume may be used where no transaction volume is available.
At this point, it is important to note that volume gives us an indication of the amount of activity that has taken place during whichever time frame is being monitored.
All markets move in ‘phases’; we can observe the market building a cause for the next move. These phases vary – some last only a few days, some several weeks. The longer phases give rise to large moves, and the shorter phases result in smaller moves.
The amount of volume taken in isolation means little – it is the relative volume we are interested in. The chart below shows the relative volume indicator that is unique to Trade Guider. It is showing that there is considerably more bearish volume in the market, which is why the prices decline on this chart. Once you have established the relative volume of business, you must consider how the market responds to this activity.
The spread is the range from the high to the low of the price bar. We are particularly interested in whether the spread is abnormally wide, narrow, or just average. The Trade Guider software interprets the spread size, and all other relevant information for you, so there is no need to establish anything by eye (which can be difficult at times). The graphic below shows how Trade Guider reports all the required information with easily comprehensible English words, rather than arbitrary numerical values.
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