Can you recognize a trend? Are you using the right trend trading strategy? As with any market, there are discernible trends in the financial markets – not surprising given there are millions and millions of transactions happening each business day. But spotting a trend can be time consuming. Read on for some tips on how to make Wyckoff Volume Spread Analysis tools work with a trend trading approach.
The trend is your friend
Being a trend trader means that your strategy capitalizes on uptrends or downtrends on the assumption that the price will continue to move in the same direction as it is currently.
The challenge in this is to keep tabs on multiple time frames. Richard Wyckoff, the 1920s Wall Street trader, educator and founder of the Wyckoff method on which VSA is built, noted that trends vary substantially in different time frames. He also pointed out that although broad trends in price patterns can be seen, detailed analysis reveals there are lots of small differences between past and current behavior.
And the late Tom Williams, inventor of VSA, used to say, 'The trend is your friend', meaning, if you have established the trend in multiple time frames it is the safest time to trend.
Technical analysis is often used
Trend traders most often use technical analysis tools like moving averages, an average directional index or a relative strength indicator to guide their trade entry and exit points.
But these can let you down. Just because the market behaved a certain way in the past doesn’t mean it will do the same in the future. We discuss this issue here.
By using technical analysis a trader is trying to be a mathematician and impose formulas onto perceived market behavior. But really we should always be looking at what the charts are telling us about cause and effect.
Trade the right trend with Wyckoff VSA
As we’ve mentioned, the Wyckoff VSA methodology enables you to trade in harmony with the market movers, professional money, the smart money operators. Rather than being manipulated by them, you can sell when they sell, and buy when they buy, and find yourself on the winning side of the trade more often. It is this cause and effect we are tracking.
As Tom Williams said, trends usually go on for a lot longer than you expect them to. If you read the charts according to Wyckoff VSA principles then it enables you to continue in the trade longer than uninformed traders who often get mislead by following their gut instinct.
Tradeguider's CEO, Gavin Holmes, explains: ‘In a downtrending market look for the “Upthrust” or “No Demand” Tradeguider indicators - these are the two most bearish ones’. (Bearish activity is decreasing volume on an up bar).
‘”Upthrust” is where the professional money has sold up at the top, the market is collapsing and as the market maker tries to hold the price up, the volume isn’t there’, he says.
A 'No Demand' signal shows a downtrending market (USD CAD currency pair)
‘In an uptrending, bullish, market we are looking for “Testing”, “Lack of Supply”, and one of the strongest indicators, “A Test in a Rising Market”’, says Gavin. (Bullish behaviour is increasing volume on up bars).
If you’d like to see this in action, check out this short video on how to use Wyckoff VSA tests in an uptrend trade setup.
'Test in a Rising Market' shows a uptrending market (GBP USD currency pair)
But it’s always about your own personal trends
Whether you use Wyckoff VSA or not, any trend trader needs to make use of take-profit and stop-loss tools to avoid haemorrhaging cash if the market direction switches and a trend reversal occurs. Risk management is always the name of the game, whatever your trading method.
(By the way, if you want to take advantage of trend reversals, this blog covers what are some good counter-trend trading strategies.)
At the end of the day though, whatever strategy you follow, it always comes down to your individual skill as a trader regarding discipline, patience and attitude.
Breadth of view and software support
As mentioned, the key to trend trading is checking multiple time frames.
‘Don’t just sit there looking at a one hour chart,’ says Gavin. ‘The question is, is the trend in a one minute, one hour, daily or weekly chart? After all, gold was trending up for about 12 years.’
(This was despite what was being reported in the news on a daily or weekly basis.)
This is where the power of computing comes into its own. For example our SMART Technology can scan 10 time frames for 25 instruments simultaneously, looking for your selected parameters to come about on the chart and providing a summary of your selected time frames in the one Symbol Scanner window so you can spot a trend alignment.
We also have short and medium term trend tools which look for VSA indicators and sequences across selected time frames, including relative volume. These can be configured to match your trading strategy and help keep you successfully trading with the trend.
If you like the idea of having set steps to follow to support your trend trading then our Chart Center package comes with the pre-set ‘TrendSetter’ Strategy document. It gives checklists for going long and going short and also gives guidance on when to catch the beginning of a trend in what might be a lower probability, but higher profitability, move.
You can see more about this in this video or download the TrendSetter strategy document for yourself via the Chart Center page.
Tradeguider is the home of Wyckoff Volume Spread Analysis (VSA). The creator of VSA, Tom Williams, was a trader himself. He combined Richard Wyckoff’s insight into the real forces behind the markets and with his chart reading expertise to codify what the charts could tell the informed analyst about smart money actions. Tom himself championed trend trading, the importance of being aware of the trend and of how it works. He was all about educating traders and so are we, so check out our Free Resource Center for more.