G: I’m here with Tom Williams, in Worthing, South of England, and we’re going to talk about Volume Spread Analysis. More importantly Tom, what IS Volume Spread Analysis? So perhaps for the people here, you can explain what Volume Spread Analysis is.
T: Gavin, thank you. Well for short, we call it VSA. Volume. Spread. Analysis. It’s really self-explanatory. To analyze a chart you have to look at the volume, and on that volume, you will want to notice what has the price done on that volume. Has it moved up, down or gone sideways? Those two ingredients will give you the answer to the market, in most cases. It is always there in hindsight, so if you look back at price action, all these principles that we talk about are there, but if you don’t see them at the live edge of the market, you obviously need to put some more study in. But if they are there in hindsight, they must be near at the live edge of the market.
If you were to be sitting in front of your computer one day and see a large amount of volume on an up bar, you would ‘because you have been told’ assume that strength always appears on up bars, and weakness always appears on down bars. Because you have read this in books and magazines, you would take this at face value and believe this to be true. In actual fact, up bars with excessive volume is weakness, as down bars with high volume shows strength. How can this be true? Well imagine you are an operator with a large block of stocks or shares to dispose of, how can you do this without putting the price against you?
This would mean marking up the price to bring in buyers. Rising prices create demand; demand does not create rising prices. If you see prices rising, you are more likely to buy than sell, as you would expect to make a profit as prices continue to rise, but if you cannot read volume, your image of these rising prices would distort the true picture as you would think it bullish, you would not see excessive volume indicating weakness.
Now what people have to realize is, that this is not using any mathematical formulae at all. It’s just purely looking at the supply and demand from the ‘professional side’ of the market. It’s very reliable, and it works, and we can prove it works, because we have software that comes up with signals of what I call, ‘uncanny accuracy’. They only appear automatically on a live feed without the intervention of human beings, if you get the logic right. Many traders out there have some good ideas, but when they test them, they’re lucky they work 40% of the time. You will notice that the indicators generated by using VSA, are approximately 90% accurate.
You might think that 90% accuracy is wonderful, but you can’t forget that there are two sides of making money in the market.
First, you need to be able to analyze the market, which you find is very tricky in a way. We’ll explain why, but the other skill - you must be a good trader, a trader in your own right. You need to be able to pull that information and put it to some good use to turn it into money.
Now volume is the most important ingredient. Keep in mind that the average bank in the city of London will fill two telephone directories per day with their orders- and that’s just one bank, one merchant bank, so that’s just to give you an idea of the volume that’s involved here. And what you’re looking at, is a consensus of opinion from the professional side of the market. Not all these professionals communicate with each other, they all work in isolation. But one thing is for sure - if they are making a bad trade, they will close out very quickly and switch their positions. So volume is extremely important.
Now when you see the varying amounts of volume; it may be high, it may be very high, it may even be average, or it can be low - it all means something very, very important. But that only gives you half the information. The other half of the information is in the price movements, or the price ‘spread’.
G: Or the ‘range’. In other countries like America, they call it the range of the bar.
T: The ‘range’ of the bar- yes, that’s what it is called in America.
G: Yes, let’s be clear, we’ve talked about the volume, but the range or spread of the bar is the ‘high’ or the ‘low’ of the price bar, in any time frame - it doesn’t matter what it is, but it gets to a high point and it gets to a low point before it closes, but then eventually it closes. You can look at a 1-minute bar or a daily bar; all the principles are the same.
T: The close is very important; we don’t even use the open. Openings are usually used by people who are using mathematical formulae. Mathematical formulae have been around for nearly 30 years - now, I’m not going to belittle them, but if you are an expert in any of those fields, what you could do is, use VSA and if VSA is backing up what your expertise formula is telling you, then you’re probably right. If it’s not backing up, perhaps you will want to tread cautiously, and trade only one or two contracts if you usually trade 10 or more. So it definitely is a super way in backing up any other systems.
You can even back up newspaper reports with it. Just see when a newspaper is telling the truth or not. Of course newspapers use fundamentals, and sometimes they’re right, sometimes they’re wrong, but there is a sure way to tell you if they’re correct or not.
G: Tom, may I ask you another question? Many traders I talk to are using technical analysis, which you said is based on mathematical formulae. There are many, many ways to analyze charts based on technicals. I know there are thousands of books on it. And many of the tools available, I know, will look back on the past of the price movement, to analyze and try to predict the future price movement. In fact, most of the retail traders I talk to use some form of technical analysis, because that’s what almost everybody teaches, to consider what they think is high probability trade set-ups. But often - from what I hear, the system will give them a green or red indicator based on the past price. And as they enter that position, the market moves heavily against them. Its almost always at the top, they will come in and buy at the top, or they’re going to sell at the bottom.
Now, can you explain to us why you developed Volume Spread Analysis? And how is it so different from a standard technical analysis indicator?
T: Well, my story was that I went to the United States in my late 20’s. I really didn’t have money at all to speak of, so naturally I went looking for a job. I was lucky enough to fall in with somebody who happened to be a part of a charter trading syndicate. These are groups of people who get together, who have large sums of money at their disposal, and they would also trade other peoples’ money. And they would accumulate/distribute the underlying stocks. It’s very, very profitable. And it’s this accumulation/distribution of the underlying stocks that is actually causing the bull moves and the bear moves.
I was really good at technical drawing. I use to draw these charts for them. They were huge charts, it would cover a desk, and you would put the high, low, close, and the volume. But I really had no idea of what it was about for at least two years. But then one of them suggested, the owner suggested, that I take the Wyckoff course. They also paid for it. It was even $500 dollars in those days, and it was located out in Park Ridge, right by Chicago. I studied the course for about a year, and then it all slowly started to fall into shape. Don’t forget there were no computers around, no futures; it was all stocks and shares, commodities, and options. That’s how I got started. Well I did very, very well and retired at 40, and went back to England. Computers were just coming out at that time. I believe IBM just had their first desktop they were promoting because this was when Bill Gates got involved.
Now I didn’t know the first thing about computers, I’m still no good at it. So I wondered if the information and knowledge I had learned from the syndicate could be computerized, and the reason why I thought that was because I was sure if a computer could do it, it would remove the emotional factor from trading. The computer has no emotions, it can’t feel or see emotions, so the logic you put into the computer is either right or not right, it is as simple as that. That’s how I started, and then I employed a programmer to do this, which was and is very expensive.
Low and behold, I gave the info to the programmer and luckily, he was able to reproduce what I was telling him into a form and series of signals. That’s how VSA started.
G: To recap, this program is completely unique to TradeGuider, and you had the good fortune of spending so many years with the syndicate, learning how they traded. Now I remember you telling me a story of how the market, or markets, can be somewhat manipulated and you get misinformation. However, the 'Smart Money' cannot hide their intentions in volume. So the misinformation is what causes the emotional decision making process for each individual trader, which causes them to lose money because in affect what a market is doing is giving you information. You hear information about the market from many places, the TV, newspapers, friends, your broker, etc. There’s so much information for the trader, it’s almost impossible to decide.
But the two things that you told me that have stuck with me are:
- - You said the chart never lies if you know how to read it correctly.
- - Many of the retail traders are losing money, and that many of them can be successful if they do one thing, namely the opposite of what they’re doing now.
Now that comes tongue-in-cheek, but can you elaborate on those two points ? Why the charts never lie and why is the retail public consistently losing money? And since VSA is here to help them, please elaborate on those two points.
T: It’s well known that 85% of all options never exercise. Well that means 85% of all options must be losing. It’s also fairly well known in circles that 50% of all stock traders lose money. You only hear the good things, you don’t hear about the 50% that lose money trading stocks and shares. Now the futures are horrendous, 90% or more of futures traders lose money. And of course, the markets do not want you there; they do not want you to make money. So they do everything conceivable to put you off.
G: Who is ‘they’, Tom, you mention ‘they’? Who are ‘they’?
T: Who are ’they’? Well the Professional Money, or ‘Smart Money’. What they do if they see an opportunity is manipulate the market, and take full advantage of anything that happens to distribute (sell) or accumulate (buy) the market they are trading.
G: I just want to be clear - your methodology works in all markets, whether it’s stocks, foreign exchange, SPOT FX… I just want to be clear here, VSA, the methodology, the TradeGuider software works in ALL markets where there is available volume, is that correct?
T: That’s right. This is because it’s traded by human beings, and you will find human beings will trade markets in certain ways. Different intensities, yes, but they all basically trade the same way. They have to accumulate a line, they have to mark it up and resell it. If you think about it, any business on the planet works that way. If you’re a shopkeeper, you have to buy wholesale, then you have to present it nicely, mark it up, then you have to resell it. That’s how you run a business. That’s how you do it in the stock market. Huge amounts of money are in the stock market purely because they want to trade it and make profits from it.
G: Not just the stock market, its all markets. Markets are made up of traders, individuals, banks, large institutions and syndicates. You were a member of one of those syndicates, which is why VSA was created - for the retail trader, but I often get asked, why did you blow the whistle on what’s going on? What made you decide to give to the general public your knowledge? You were given very privileged knowledge being invited into a syndicate? You didn’t have to retire, you could have made your own syndicate and made millions - what was your reasoning behind that?
T: The main reason was the advent of the computer. Without these computers, without the Internet, you really couldn’t go far at all. But with the advent of the computer and Internet, it made things far easier. Don’t forget when I was doing it, I had to draw all the charts by hand. You could only realistically track 10-12 instruments; cattle or corn, or a stock. So that was the reason. And I also had been retired; I was only 40 and still very, very active. Naturally, I still thought the subject was so fascinating, I decided to computerize it. Now the reason I wrote ‘The Undeclared Secrets that Drive the Markets’-(gets interrupted)
G: Now called ‘Master the Markets’
T: Yes, ‘Master the Markets’, the reason I wrote that book, was so that people who bought the software could read the book in a day or so and have an extremely good idea of what it’s all about and what they would be looking at. And the thing is, you can rely on it. It’s very accurate. The volume is showing you the amount of activity that’s actually taking place amongst the professional money operators.
G: To end this particular session, many people will listen to this recording or read the transcript and some traders will be experienced yet still be losing money, some experienced traders will be gaining money, or some will be new and just starting, like I was 9 years ago when we first met. What would be your advice to anyone wanting to make money in the markets? What would you advise them to do?
T: I would advise first of all, how treacherous and dangerous the market really is. That’s the first thing you need to understand. The market does not like you, it does not want you there, and you’re there for one reason only - to be one of the losers. For the market to work, you need to have far more losers than winners. It’s like a pyramid. It won’t work if everybody is a winner. It can’t work. That’s what drives the stock market. The nature and how the markets work to put you off.
The single reason for that is the professional money. The professional market has to sell into up bars, which immediately deters people, and then to buy on down bars, which again, deters people. When the professional money buy on a down bar, the news is most likely guaranteed to be bad. So the would-be trader thinks, “Oh I can’t buy on this, despite what that Tom Williams said… No, no, its falling, the news is all bad, no, no, no…” But that is professional money stepping into the market buying against the bad news. And the same is true for the top. The news will always deter you from a perfect trade.
G: It’s almost like people who read or hear this will have to re-evaluate their thinking. Because by natural instinct, if you see good news, hear good news, and the market rises, you want to buy, and the same for if you see or hear bad news, and the market falls, you want to sell. However, with VSA, it’s the other way around. And actually, it’s the truth.
So Tom, thank you. It will make sense to people who read this, but the secret is to look at the charts, then discern the reasons why. Look at where you lost money, look at where you got stopped out, and then look at why.
The great thing about charts is that they leave patterns and they tell you a story. If you can read those patterns, you can tell the story in the future. And that means if you’re live into the market, you will SEE these patterns, and then you will understand by reading Tom’s book and using the TradeGuider software that actually when you think you should be buying, you should be selling. And if you think about selling, you should be buying. And that’s the way the markets work.
Thank you, Tom.