VSA: Supply and Demand Test
Hello, friends! We continue to study the Forex trading methodology with volume analysis, also known as VSA.
This time we will talk about the formation, which is called Testing or simply Test. The bottom line is that market makers often “check the ground” before starting / continuing a campaign for buying / selling. Namely: they create false movements in order to identify the presence of strong sellers / buyers who can stop them. And if there are none, the bigwigs of the foreign exchange market begin their "dirty business." How to recognize such moments, and how to make money from them, we will find out in today's lesson.
Before we get started, I would like to recall one story from the book of Edwin Lefebvre, entitled "Memoirs of a stock speculator." It tells the story of an old and experienced trader. He had his own office and assistants. One day, one of his people runs into the office and says that a lot of stocks of such and such a company are bought. Some good news and indicators came out on it and in general shouted out what to buy before it was too late. The deal is right.
The old trader says that it’s good and turns to his secretary: “Sell so many shares of this company.” The assistant who told him the positive news shouts: “How so? We have to buy!” And he answered him: "No, we sell." The secretary fulfilled the order and sold a few shares. And the trader is sitting and watching how the market will react. The market is not declining. “Let's sell even more,” the old trader said. The secretary again sells the shares, but the market still does not decline. Growth continues.
Then the trader says: “Well then, great! And now let's get a purchase!”
What happens in this story? The trader tested the market on how quickly it will absorb its sales. Is there a demand for these shares and are they really being bought up quickly and in large volumes. And also this trader tested the market for the presence of some major sellers who, having seen his sales, could also start selling and create obstacles to growth. He tested the market and when he saw that they were really buying up shares, he began to buy them.
The same thing is happening now on the stock market and the forex market. The only difference is that in the forex market we trade in both directions, and in the stock market purchases predominate. But stocks are a completely different story, so we are analyzing forex.
What is a test?
Let's move on to the definition:
The VSA test is a movement triggered by market makers to determine if there is a supply / demand in the market that could interfere with their sales or purchase campaigns.
Let's say market makers want to buy. They push the price down and look: are there a large number of sellers whom they are trying to seduce with this false movement. And if there are no sellers, you can start some kind of large-scale shopping campaign. Below we will analyze it on the graphs, so that you will understand everything.
A successful test, that is, a test after which the movement towards the purchase campaign or the sales of the market maker begins, is characterized by a small volume and the subsequent price rebound in the opposite direction. We are looking for a false movement on a small volume, and then in the opposite direction. After we receive confirmation that this is a test, we can enter the market and make a profit.
Let's take a look at the chart to make it more clear.
This is not the most beautiful graph, but it is needed so that the examples are more practical. The chart shows a downtrend.
We see that after it is precisely formed, starting from this point, the question arises: will it continue further?
Nobody knows that. This is also unknown to market makers, and they want to know if it makes sense to continue selling. Maybe the market wants to turn up and it will bring them loss.
And about here, they begin a small procurement campaign:
Simply put, they want to push the market up in order to see if there are any large number of sellers who are happy to take this impulse and continue to move up.
If this happens, then, accordingly, market makers in this case do not need to open any large number of sales, and they will start to be purchased along with the crowd best. They check if there are anyone who wants to buy and give a small boost:
The level that was formed earlier was specially struck to activate the orders of those who placed limit orders and to show that it’s boosting upwards, let the guys buy if you really have such a desire. This is testing for market demand.
There were no willing to buy and we saw the following candles down:
Since the volume of purchases was small, we conclude that it was testing, and not some kind of nascent upward movement. Further, we see confirmation of our theory in the form of candles with a downward direction. We know for sure that this is testing and it was quite possible to start selling. The most important thing to understand is the essence of this setup. Market makers check the market for the strength to withstand them. If there is no such force, then they begin to move in the direction where they intended.
How to enter the market?
But in order for us to consider this setup as an opportunity to enter, there must be strength in the market. If we are going to end up buying. Or weakness if we are going to eventually sell.
On the chart there was a clear trend down. Here, weakness was observed against the background, so it was possible to enter sales on the basis of this setup.
Let's look at another example on the M15:
We have a strong surge, so we can assume that the trend should be up. But will it go on?
After the horizontal movement on the chart, this was not clear:
The market could well collapse, because it created a double top. Therefore, the question arises: Does it make sense for market makers to continue shopping, or is it not worth it?
And they conduct a test - a false downward movement:
It looks like a correction on a trend up, but note that we have a small volume:
The end of the correction is realized by a low volume, and it continues to fall. And after that a candle appears up. I note that the candle must be of a normal size in order to enter the market. If the candle is small, it is better to wait and see how the chart behaves in order to enter the market in the future.
As with all VSA setups, we look at effort and outcome. If there is no result, then something is wrong here. And this is not what we originally intended. After we receive confirmation, you can enter the market. We put Stop Loss below this peak of the trough and enter into purchases. Let's look again at what happened here. There was power in the background. The trend was heading up. And then there was a lull. Further, the market makers drew a test for us to find out if there are anyone willing to sell on the market.
To do this, drove the price a little down:
We drove her to a level that was previously formed by local minimum points:
The task of market makers is to show those who want to sell that the price has broken the level and thereby stimulate them to sell. If those who want to sell begin to actively participate in the auction, then market makers understand that selling now will be unprofitable.
Testing on an uptrend is characterized by breaking through previous local lows. And only after we have broken some significant line, we can begin to consider entering the market, realizing that it was definitely a test, and not some kind of candle in the wrong direction.
After we break through the level and a candle is formed in the opposite direction, a small volume prevails:
On this small breakdown of the level, we can consider the entrance.
What is worth noting?
If you are in doubt whether this is a test or something else, it is best not to enter at all. Because the definition of the test requires a certain skill and experience. If you do not see at the moment or are wondering what is happening on the chart, then it is better to ignore and see what happens next. You will always have time to enter the market. He will not run away from you anywhere.
In addition, must be for the consideration of purchases pone strength. This may be an uptrend or prerequisites for it. Either a downtrend, or the prerequisites for a downward movement. Moreover, the end of the correction, if it is some kind of major correction, may be in large volume. But here we will already have the culmination of purchases / sales.
We look at small bursts, which, nevertheless, try to attract the attention of buyers or sellers, breaking, as a rule, the levels. And thus, market makers check if there is resistance in the market to their purchasing or sales campaigns.
Here is another good example:
Here we had a triple top. We see a downward movement, but it is not clear whether it will continue downward or the market will turn around and go up:
Again, we see that market makers are slightly pushing the price up and a pin-bar is looming here:
It breaks the previous level, formed by a local minimum:
Level breaks through. By price action, we are ready to enter by pin-bar to continue the trend. And, at the same time, it was testing by market makers. We can determine this from a volume below average:
And then there is a U-turn:
Here the candle might have seemed too small, so you could wait for a later candle to enter. Suppose you could wait another 2 candles down:
Stop loss would be just above the tail of this candle:
We have separate lessons on how to get out of such setups. There are many exit options every time. Choose your convenience. You can go to the nearest resistance support level or multiply stop loss by two.
If, for example, to do this on this candle, we set the stop loss above the high point:
After it, we could really confirm for ourselves that this is a test. The candle broke through the level and gave a signal that it was time for everyone to buy. There were no volunteers and the market makers continued the sales program.
You can measure stop loss, multiply by two and exit the market somewhere here:
You could wait and get a little more profit. In fact, there are many options. We analyzed them in a separate lesson from the series on price action, which is called: "Exit Strategies".
What do market makers do? They try to check if there are buyers on the market who want to buy in large volumes. If they want to sell, then buyers who have big money will subsequently bother them. Buyers can start buying a little lower as soon as market makers enter the market and they have to deal with them, and this is a loss of money and time. Market makers don't need this.
Therefore, before starting a sales or purchase campaign, they check to see if there is an opposing party in the market. And thus, by false bursts (and, as a rule, a breakdown of some visible level follows), they try to create a desire from customers to buy. And if there are no such buyers, then market makers begin to sell.
This test movement is characterized by a small volume. And in order to enter the opposite direction, a false movement along with market makers, we should wait for confirmation. That is, one large or several medium candles in the direction of this movement, where, as we assume, the market will move. Stop loss set slightly below or slightly above the nearest local maximum or minimum. This is usually the shadow of the candle that completed the test.
Well, goals are already determined at will. You can multiply by two, but you can enter with a goal at the next level. Also, you can close the position in parts or set some specific take profits in points, if you know that the average price moves on an impulse of 15 points. It all depends on the pair and timeframe. You define your goals yourself.
I hope that I was able to convey to you the essence of the “Test” setup and explain how market makers test the market before continuing any of their sales or purchase campaigns.
Test (under VSA) - this is a movement caused by market makers to identify the presence of supply / demand in the market that could interfere with their sales / purchases.
A successful test is characterized by a small volume and the subsequent rebound in the price in the opposite direction.
P.S. For those who have just joined us, I advise you to start by familiarizing yourself with the previous VSA lessons: