Each week I try to look at a particular charting or trading principle-
Previously I posted about a Wyckoff principle called
springs - click here
and their mirror image opposite called
upthrusts - click here
Then I posted about a principle called
bullish absorption - click here
Following that was about a VSA principle called
End of a Rising Market - click here
and then the mirror image opposite called
Bag Holding - click here
Then we considered
Looking for Trades at the Edges of Trading Ranges - click here
and two weeks back we looked an example of a
Potential Accumulation Zone - click here
We have looked at a VSA principle called
Upthrusts - click here
Next we considered what a
Serious Supply Event - click here might look like.
We have also looked at another
Serious Supply Event - click here
Then we looked at trading and
Position Size in particular - click here
Following this I posted some diagrams about
Traditional Chart Patterns - click here
Since then we looked at
Accumulations Zones - click here
and after that was a discussion surrounding
various Wyckoff Terminology and the Wyckoff Schematic - click here
Then we looked at
Consolidation - click here
10th November 2017 we had a broad look at
Volume - click here
This week I thought we could look at a VSA principle called a Test
Generally, price will find it difficult to gain much ground when excessive supply begins to be drawn out.
When this occurs price will often pull back briefly to challenge any sellers to come out and in doing so 'test the market for supply'.
Testing like this can occur at anytime, however tests always work best, and are at their most powerful with strength (buying) in the background, or when price is in an uptrend. Tests are roughly neutral when price is in a sideways trading range or accumulation zone, and they work worst, or are least powerful, when price is in a downtrend.
A test bar is also used to confirm bars that indicate serious buying or support (a climactic bar), and can also be used to confirm the trend.
The Textbook perfect description of a VSA Test is -
a narrow spread downbar, closing mid to high, on low volume.
The test bar will usually dip lower within the range of the previous bar. The narrow spread is an illustration of reduced volatility, and the lower volume suggests selling pressure is low. This sets the stage for the next bar to close higher.
VSA gets a bit hung up on names I think, and so they have eleven different types of tests (twelve if you include the shakeout - which is just an 'extreme' or 'violent' test in the end). These are all just slightly different variations of the same thing overall (which is testing the market for excessive selling pressure). I find all these different names a bit unnecessary, and they just add to the confusion when learning the VSA principles. I will include a list of all the different VSA indicators at the end of the post, and you can see all the different tests at the bottom of the list as "confirming indicators of potential strength'.
In the real world tests might not always be perfect, for instance-you might get a bar which sweeps lower in the fashion of a test, but eventually closes a little higher (a test should be a downbar). So long as the majority of the bar traded as a downbar, and the spread or range is narrow, and the volume is low, that is still quite acceptable as a potential test.
At other times the close may be low on the bar (not mid to high), in this case, so long as the spread or range is relatively narrow, and the volume is lower than the previous volumes, it is thought of as a 'no supply' test, and is also considered an acceptable potential test.
A test bar is a "potential" test when it first prints, and is only considered a "Successful Test' when the next bar closes higher.
A successful test is considered as a sign of strength for the future.
Tests can and do fail, and a failed test is treated as a sign of weakness in itself, especially when price is in a downtrend.
A failed test is usually one which continues to draw out excessive supply (selling), forcing price to pull back even deeper, in an effort to flush out, and remove the sellers.
In an uptrend you want to see expanding volume on upbars, and contracting volume on downbars.
So if price has moved higher for a number of bars, as the volume expands it can begin to look a bit excessive, and the shallow pullback that often follows is usually a test (of some type). So the Test bar is also a way for volume to 'reset' to more normal levels, before it begins to expand again as price continues to climb.
It is quite common for the initial test bar to have a wider spread than is considered ideal, or sometimes the volume is not particularly low, and instead of moving higher, price appears to test for a second time. A secondary test is also quite acceptable, especially if the spread is narrower than the first, and/or the volume drawn out is lower again.
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It sometimes takes a while to 'get your eye in' when looking at a chart, and seeing the test bars, but once you understand what you are looking for, and what they look like, they begin to stand out.
On the chart below is a text book perfect test bar.
Copy the image and paste it into Paint (or similar software), and see if you can find the obvious test bar (mark it, and post back on the thread if you like). Secondly, look carefully and see if you can find any other tests, including any failed tests.
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Below is a complete list of the various VSA indicators for Strength and Weakness.
(Strength is serious Buying - Weakness is heavy Selling)
As I mentioned earlier, VSA gets a bit hung up on all these different names for individual bars, when really they are just different variations of the same (or similar) things. All these names can be confusing when learning about VSA, and sometimes cause debates about "which type of bar it really is". When in the end they are just minor variations, or different degrees, of the same thing, and instead of debating the individual bar name, the time would be better spent analysing the chart..
In reality there are indicators of strength and weakness, and these can be broken down into "primary indicators" - which are the climactic bars indicating serious buying or heavy selling, and "secondary indicator" - which are used as confirmation of the primary indicators.
All the different test bars are at the bottom right hand side.
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