Invesco QQQ Trust, Series 1Đào tạo
How I used Volume Spread Analysis to avoid FOMO trading!
As a trader, I often battle with the fear of missing out (FOMO), a common pitfall among traders that can lead to impulsive, unprofitable trades. After reviewing my journal, I determined that chasing breakouts was costing me a significant portion of my account, so I studied Volume Spread Analysis (VSA) to help me reduce my urges. Here is how is used VSA to avoid FOMOing a trade.
Before we get started, let's clarify two definitions:
Volume: Measures the number of times buyers and sellers exchange 1 unit of an asset at an agreed-upon price. It doesn't inherently indicate whether a trend is bullish or bearish, but rather that a trade has occurred. Low volume suggests that few transactions have taken place because buyers and sellers couldn't agree on price. High volume suggests that buyers OR sellers felt they were getting a bargain at the current price, leading to many transactions.
Spread/Range: The difference between the high and low of a candlestick. A narrow spread indicates little variance between what someone is willing to buy for and what someone is willing to sell for. A wide spread suggests that buyers and sellers have significantly different ideas of what the fair price is.
In short, Volume Spread Analysis (VSA) interprets the relationship between trading volume and candle spread. When volume and spread agree, they are considered harmonious, and the trend will probably continue. If volume and spread disagree, there is a divergence, and the trend may be weak or could even reverse. In general, there are three main harmonious conditions:
I spotted a bear flag consolidation on QQQ and decided I would trade the breakout to the downside. I took a break and came back to the chart just after the breakdown had occurred, missing my ideal entry. The candle spread was widening and my first thought was "I have to get in! This thing is free falling!" PAUSE! I reminded myself that I cant make every dollar in the market. If I miss this trade, there will always be another. "Be patient and wait for the market to come back to you."
This is the chart after the initial break. What can we observe? QQQ broke the low of day with high volume and a widening red candle. Based on our definitions from earlier, we know that high volume means that buyers or sellers think they are getting a bargain so they are willing to transact as much as they can at current price. Given that price is falling, we can assume that the volume is due to aggressive selling. We remain patient and continue to watch for something to trade against.
Next, we see a narrower range candle with a long lower shadow and above average volume. By definition, strong volume with a narrow range is a possible divergence. We know that narrow range candles mean that buyers and sellers generally agree on current price, but why would it close near the highs if the selling was so aggressive? Given that there is a long lower shadow and then a bullish candle close, we can infer that sellers were not willing to sell below $467.89. The buyers absorbed the selling at those prices.
Fast forwarding, we notice that the volume and candle size has shrunk back to the average meaning buyers and sellers are in agreeance. The number of people willing to transact is decreasing. We also notice that a small range has formed. Buyers have not stepped in to buy above the previous low of day at $469.35 and the sellers have shown no effort to get back below $467.89. Now we have something to trade against instead of FOMOing in! We will look for a break of this range with increased volume.
On the next candle we see bulls break out of the range with aggressive volume and a wide spread candle. Something of note is that the volume on this bull candle is less that the volume of our initial sell candle. If those sellers were still present, wouldn't they be selling at these higher prices and forcing the candle range to be narrow? This shows us that bulls are now in control and the selling from earlier was just a hoax.
As we can see, the rest is history. If I FOMOed into the short as I had planned, this trade would have resulted in a loss. Being patient allowed me to realize that there was nothing to miss out on and actually allowed me to find a better trade.
Key Notes
Before we get started, let's clarify two definitions:
Volume: Measures the number of times buyers and sellers exchange 1 unit of an asset at an agreed-upon price. It doesn't inherently indicate whether a trend is bullish or bearish, but rather that a trade has occurred. Low volume suggests that few transactions have taken place because buyers and sellers couldn't agree on price. High volume suggests that buyers OR sellers felt they were getting a bargain at the current price, leading to many transactions.
Spread/Range: The difference between the high and low of a candlestick. A narrow spread indicates little variance between what someone is willing to buy for and what someone is willing to sell for. A wide spread suggests that buyers and sellers have significantly different ideas of what the fair price is.
In short, Volume Spread Analysis (VSA) interprets the relationship between trading volume and candle spread. When volume and spread agree, they are considered harmonious, and the trend will probably continue. If volume and spread disagree, there is a divergence, and the trend may be weak or could even reverse. In general, there are three main harmonious conditions:
- Narrowing spread should have narrowing volume.
- Average spread should have average volume.
- Widening spread should have widening volume.
I spotted a bear flag consolidation on QQQ and decided I would trade the breakout to the downside. I took a break and came back to the chart just after the breakdown had occurred, missing my ideal entry. The candle spread was widening and my first thought was "I have to get in! This thing is free falling!" PAUSE! I reminded myself that I cant make every dollar in the market. If I miss this trade, there will always be another. "Be patient and wait for the market to come back to you."
This is the chart after the initial break. What can we observe? QQQ broke the low of day with high volume and a widening red candle. Based on our definitions from earlier, we know that high volume means that buyers or sellers think they are getting a bargain so they are willing to transact as much as they can at current price. Given that price is falling, we can assume that the volume is due to aggressive selling. We remain patient and continue to watch for something to trade against.
Next, we see a narrower range candle with a long lower shadow and above average volume. By definition, strong volume with a narrow range is a possible divergence. We know that narrow range candles mean that buyers and sellers generally agree on current price, but why would it close near the highs if the selling was so aggressive? Given that there is a long lower shadow and then a bullish candle close, we can infer that sellers were not willing to sell below $467.89. The buyers absorbed the selling at those prices.
Fast forwarding, we notice that the volume and candle size has shrunk back to the average meaning buyers and sellers are in agreeance. The number of people willing to transact is decreasing. We also notice that a small range has formed. Buyers have not stepped in to buy above the previous low of day at $469.35 and the sellers have shown no effort to get back below $467.89. Now we have something to trade against instead of FOMOing in! We will look for a break of this range with increased volume.
On the next candle we see bulls break out of the range with aggressive volume and a wide spread candle. Something of note is that the volume on this bull candle is less that the volume of our initial sell candle. If those sellers were still present, wouldn't they be selling at these higher prices and forcing the candle range to be narrow? This shows us that bulls are now in control and the selling from earlier was just a hoax.
As we can see, the rest is history. If I FOMOed into the short as I had planned, this trade would have resulted in a loss. Being patient allowed me to realize that there was nothing to miss out on and actually allowed me to find a better trade.
Key Notes
- Always journal your trades and review them
- Never FOMO into a trade. Be patient and wait for the trade to come to you!
- You dont need to take every trade to make money in the market. It is okay to miss a trade if it means protecting your account.
- Volume spread analysis is not 100%, but it can be useful in determining the strength of a trend.
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