What is Volume Spread Analysis? Distinguishing it from Fundamental and Technical Analysis

Hey there! Ever found yourself scratching your head over all the buzzwords thrown thick and fast in the stock market world? Technical analysis, fundamental analysis, volume spread analysis – they all sound pretty intimidating, don’t they?

For starters, yes, for seasoned pros… umm a little less if not much. While a lot has been talked and said about technical and analysis and fundamental analysis, this blog will shed light on the third part of the puzzle, volume spread analysis or VSA.

Decoding Volume Spread Analysis

Imagine finding yourself in a bustling vegetable market. Sellers are shouting prices, buyers are bargaining, and there’s a flurry of activity all around. Now, imagine you’re trying to figure out if tomatoes are going to get pricier tomorrow. What would you do? You’d probably observe how many people are buying tomatoes (volume), what they’re paying (price), and how quickly they’re selling out (spread).

That’s pretty much what VSA does. It looks at the relationship between price movements (spread) and trading volume to determine what might happen next in the stock market. It’s like being a detective who reads the clues hidden in market activity. Let’s understand VSA with an example in different scenarios.

• Scenario 1
  

Suppose company ABC’s stock has been climbing steadily over the past few weeks. You notice that the stock’s price rises sharply on a particular day, but the volume is unusually low. The VSA insight could indicate a weak rally. If there isn’t enough volume to support the price increase, it might mean the big players aren’t interested. The trend could reverse soon.

• Scenario 2
  

On another day, ABC’s stock falls significantly, and the volume spikes. Many retail investors panic and sell their shares, as they do often when prices fall. The VSA insight on high volume on a price decline could suggest that smart money is actually buying from panicked sellers at a discount. This might be a good time to hold or even consider buying.

• Scenario 3
  

A few days later, ABC’s stock starts rising again, this time with high volume and a wide spread. The VSA insight may signal strong buying pressure and validate the upward trend. A thorough analysis of these VSA patterns helps you make informed decisions rather than relying on hunches or following the crowd.

How is VSA Different from Fundamental Analysis and Technical Analysis?

Okay, let’s pause for a second. You must be probably wondering, “Wait, how’s this different from technical analysis or fundamental analysis?” Good question! Let’s rewind and recall lessons on fundamental and technical analyses to understand the difference.

• Fundamental Analysis
  

Imagine you’re figuring out whether to invest in a company. You’d want to know if it’s actually worth your money, right? So, you dig into its financials – revenue, profits, debts – and maybe even look at its industry and competition. That’s fundamental analysis. It’s all about understanding a company’s value and long-term potential. Think of it as checking a car’s engine before buying it. You’re looking under the hood to see if everything’s running smoothly.

• Technical Analysis
  

Imagine being a part of a crowd watching a car race. You’re not interested in the engine’s horsepower; you’re focused on how the car is moving. Is it speeding up? Slowing down? That’s technical analysis – analysing price charts, trends, and patterns to predict short-term movements. It’s all about reading the market roadmap.

• Volume Spread Analysis
  

Enter VSA, which takes your analysis a notch higher by asking:

• Who’s driving this car?
  
• Are big investors (aka the “smart money”) quietly making moves?
  

It combines volume and price data to figure out whether the current trend is strong or just an illusion. Think of it like this: If fundamental analysis is about knowing what to buy and technical analysis is about when to buy, VSA is about understanding why the market is behaving the way it is. It’s the secret sauce that adds depth to your trading strategy.

Wrapping it Up

Volume spread analysis might sound scary at the first glance. However, at its core it’s just about observing price and volume closely to understand market trends. It’s like playing detective in the stock market, trying to figure out what the big players are up to.