Smart Money

Tom Williams writing about Volume Spread Analysis  (VSA) groups traders into Smart Money and the Herd.   He advises that Smart Money have to sell into uptrends and buy in to down trends which is the opposite of the way traders normally think.  This contrarian concept has puzzled me for a long time.  Re-reading Larry William’s (no relation to Tom) book Long Term Secrets to Short Term Trading, offers a possible solution.  Larry Williams states that since 1965 his operating rule has been “sellers in any time period are represented by the price swing from the high of the day to the close, while buying is represented by the close minus the low”, p.36, John Wiley & Co, 1999.  I think Chaikin’s Money flow uses similar concepts.

So here is how my new Bull chart template looks. I adapted as discussed further below the Wave Volume indicator provided in other post re Weiss Wave.  Two indicators are required. This is not any sort of investment advice but education on writing the indicators. The charts show Buy and Sell becasuse the markers are set up to identify start and end of trend only. The indicators show the  average or total volume for Smart money (Green) buying whilst the Herd (Red) is selling in in downtrends; and vice versa SM (Dark Violet) selling whilst the herd is buying (Cyan) in uptrends.  You may not be into VSA and may call the similar concept Bulls v Bears. I similarly colored my currently used trend indicator to show the same colour coding.

The conceptual framework works reasonably well as good strong up trends tend to be heavily coloured Cyan or Red as the Herd gathers momentum in Uptrends or panics in down trends. When SM are heavily buying the downtrends the indicators tend to show the down trend slowing or bottoming or when SM is heavily  selling the uptrend tends to slow or stops reasonably soon thereafter.  Anyway, something to play with.

On the Weiss Wave posts, I posted a formula for preparing a Bullcharts wave Volume indicator.  The changes needed for analysing the wave volumes for “Smart Money” and the “Herd” is to change a few lines of the previously advised formula as below.

For converting previous code to a SM Selling and Herd Selling average and Total  Wave volume indicator.

Add Larry Willaim’s book reference above to the Citation area and add the following new line to the code:

Value1 := (((H-C)/(H-L))*Volume); {Selling Vol}

And delete these two lines

BuyVol2:=If(BuyVol,+1*v,0);

TotalBuyVol:=If( BuyVol ,+1*v+prev(BuyVol2),0);}

 

And replace by these two lines

BuyVol2:=If(BuyVol,+1*Value1,0);

TotalBuyVol:=If( BuyVol ,+1*Value1+prev(BuyVol2),0);

And replace these two lines

SellVol2:=If(SellVol,+1*v,0);

TotalSellVol:=If( SellVol ,+1*v+prev(SellVol2),0);

 

With these this two lines

SellVol2:=If(SellVol,+1*Value1,0);

TotalSellVol:=If( SellVol ,+1*Value1+prev(SellVol2),0);

The above will give you the breakdown of the selling wave Volume into a Smart Money Component and a Herd Component.

For the Buying wave just copy the amended formula, change the name to buying  and

Just replace the Value formula to the formula shown below

Value1 := (((C--L)/(H-L))*Volume); {Buying Vol}

That’s it for the second Wave histogram.

To check if you have done this correctly the average on both these amended formulae will reconcile to the previous Wave Volume formula.

The ribbons shown on the charts are just subsets of the above amended indicators with Linestyle =Ribbon.  Text for the amount of volume can be added if you want to show in text, as well as bars.

I will add some charts below so you can make up your own mind if this is of any use.

cmacdon

I do not know if you are aware of the book, "Master the Markets".
It can be down loaded free.
Then there is Section 2 ... Trends and Volume Spread Analysis.

Then there is the Trade Set up sequences. i.e. that is the complete list of SOW and SOS.

This info came from Tradeguider.

i.e.

Short Trade Set Up.

Sequence 1
SOW1 The buying climax(start of distribution)
SOW104 Supply coming in(also has the appearance of an upthrust)
SOW199 No demand(No demand at market top).

Sequence 2
etc.

joea

cmacdon

I thought I would explain myself a little better.
In VSA software such as Tradeguider they are many SOW's and SOS's.

However there are a small number of sequences  for entry to long and short set-ups.
Short set ups are as such.

1  SOW1
    SOW104
    SOW 199

2 SOW26
   SOW7
   SOW146

3 SOW90
   SOW26
   SOW198

4 SOW134
   SOW10
   SOW134

5 SOW5 (end of rising market)
   SOW2 (upthrust)
   SOW6 (no demand)

etc. so it is  not the sign of strength or weakness, but the sequence of  of a combination of 3 SOS or SOW's that give the signal to alert.
In the paperwork I have there are 10 short and 10 long entry set ups.
no doubt there maybe  the same number of exits from short and long trades.
The sequence is the 'guts" of VSA.
You must have the accurate volume, reflecting what the spread of the price bar is telling the trader.
i.e volume spread analysis!!!

I hope that explains it a little better. ..or my understanding of it.
   
joea




Edited by joea - 30 Sep 2012 at 9:19am

Joea

I will try to answer you posts in point form.

1 I am aware of Master the Markets.  The book was provided to me when I bought Tradeguider in 2008. I quoted the book in the Citation on the VSA template I posted.  I also trade the London market at night using Tradeguider as Bullcharts cannot access E-signal data.

2. In a previous post I advised that VSA signals are very judgemental, particularly if you try to write your own code after studying the market in context. (BTW my reading of the MM book, p111 is that the 5 signs you list you would be interested in if you were a Bullish Trader are listed in the Book as being the main signs of weakness.  So you would be more interested in them if your were Bearish But see point 5 below).

3. Tom Williams in his writings and also Gavin Holmes in his videos state that VSA signals  are not buy and sell signals they are guides to help understand the context  which is what I have said in my previous posts. 

4. Gavin Holmes developed the idea of VSA sequences in his book Trading in the Shadow of the Smart Money.  I note the sequences you list in your post are from Gavins second book.  Those sequences may work under certain market conditions using the Tradeguider Software but in some contexts the sequence may not work.

5. For instance , Gavin Holmes often points out that in down trends discount the Signs of Strength signals and in uptrends discount Signs of Weakness signals. Particular sequences from the books may be Ok if you are using the Tradeguider software and their particular parameters but they are probably irrelevant if you are writing your own code in Bullcharts, as you may not replicate exactly the Tradeguider software, and you will want to research and test your own sequences. 

6. Which brings me to the issue I pointed out in the VSA template post.  The setting of the parameters and in particular selecting a trending system is very important as some signals which rely on whether the code interprets the bar as being in an uptrend or down trend.  In this regard it is of little help to me, or even a Tradeguider user, to go to the Read the Ticker site to see their trending system signals as neither Tradeguider or my particular Bullcharts VSA temp[late uses the Read the Ticker trend system.  (I have tested VSA on various trend methodologies the H-iLo zig Zag used in the Wave Volume post, the Bullcharts Trend System , Laguerre Cross overs, MA Cross overs etc).  I have settled on a trending system that gives me reasonably accurate turning points over 3 to 5 days because that suits my style of trading.  Other people may differ and in Tradeguider you can identify many different trends by varying their parameters as well.

7. In regard to the use of judgement , I would also refer you to Sebastian Manby’s Advanced VSA training videos Course provided by Tradeguider.  Sebastian is a VSA expert and was mentored by Tom Williams but he admits his interpretation of some VSA signals differ from Tom Williams’s as he has refined his interpretation as he has studied the market for himself, and sometimes he points out in his videos incorrect signals shown  in the Tradeguider software. 

8 In similar fashion the original Tom Williams Tradeguider software signals and descriptions when released in the current version were updated by Both Tom Williams and Phillip Friston another VSA expert, so they can be updated and refined over time.

8. Getting back to identifying Smart money, here is a Tradeguider chart of NAB Bank with an uptrend and a down trend.  The problem I have always had is looking at the chart how do I easily see if Smart Money is starting to get active or active. Hence my post as there is something you can do with VSA  in Bullcharts that you cannot do in Tradeguider - or at least I can't.