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TRADING FOREX USING VSA 4 STEPS CONFIRMATION APPROACH

BY LUCIANO KELLY

Copyright © 2015 by Luciano Kelly

All rights reserved no part of this may be reproduced or

transmitted in any form or by any means, electronic or

mechanical, including photocopying, recording, or any

information retrieval system without prior written

permission from the author. Your support author’s rights

is appreciated.

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About The Author

Luciano Kelly was introduced to Forex trading at the

tender age of 16 and has never stop trading since. Today

he owns and operate his very own Forex money

management company Loretta FX and he has privately

tutored over 1000 students on how to trade Forex

successfully. He is also the creator of several Forex

courses through which he has taught his techniques to

myriads of students worldwide.

From the age of 16 his aim as always been to be one of

the best Forex traders in the world and now he is, never

give up on your dream.

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Table Of Content

SECTION 1 – UNDERSTANDING SUPPLY & DEMAND

Signs of Supply & Demand

Effort with No Result

The Up thrust/Down thrust

Narrow Spread Bars and High Volume

Testing Supply And Demand

No Demand/No Supply

Fake Breaks

Stops and Take Profits

Section 2 – THE FOUR STEP CONFIRMATION TECHNIQUE

No Demand/ No Supply Entry

Demand/Supply Line Entry

The Four Step Confirmation Technique

Section 3 - HOW TO ANALYZE THE MARKET

How To Analyse The Market

Traders Checklist

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Figure 1

Chart showing the highs, lows and indicator I use to trade. There is also the Fibonacci tool which is absolutely essential in trading. The red and black indicator is the volume indicator and below that is the momentum indicator

The black lines in the volume indicator represents increasing volume whilst the red lines signify decreasing volume.

Abbreviations used throughout this book:

SOS- Sign of strength

ND- No demand

SL- Stop loss

SOW-Sign of weakness

NS- No supply

SPL - Supply line

EN- Entry

DL - Demand line

TP- Take profit

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Signs Of Supply and Demand

• Supply is the measure of how much of a particular commodity is available

at any one time. As the supply of a currency increases, the currency

becomes less valuable. Conversely, as the supply of a currency decreases,

the currency becomes more valuable.

• On the other side of the economic equation, we find demand. Demand is

the measure of how much of a particular Commodity people want at any

one time. Demand for a currency has the opposite effect on the value of a

currency than does supply. As the demand for a currency increases, the

currency becomes more valuable. Conversely, as the demand for a

currency decreases, the currency becomes less valuable.

The five major signs of supply and demand

• The up thrust/Down thrust

• The buying climax/Selling climax

• Test on low volume

• Effort with no result

• Narrow spreads bars accompanied by high volume into new high ground (sign of supply)/Narrow spread bars accompanied by high volume into new low ground (sign of demand)

Buying Climax and Selling Climax

The buying climax and Selling climax only comes along on rare occasions. It can be identified as a very wide spread up bar that closes well off the highs on

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Ultra-high volume. This is after a substantial bull market has already taken place.

Conversely the selling climax can be identified as a very wide spread down bar that closes well off the lows on ultra-high volume. This is after a substantial bear market has already taken place.

Figure 2

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Figure 3

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Effort vs Result

Bullish effort or effort to go up is usually seen as a wide spread up-bar, closing on the highs, with increased volume. Conversely, a wide spread down-bar, closing on the lows, on increased volume is bearish, and represents effort to go down.

However, to read these charts, logic must also be applied, because if there has been an effort to move, then there should be a result. The result of effort can be a positive one or a negative one.

Frequently, you will see effort with no result. For instance, you may observe a

bullish rally in progress with sudden high volume. However, the next

candle/bar is down, or has only gone up on a narrow spread, closing in the

middle or even the lows. This is an indication of weakness – the market must

be weak, ask yourself if the high volume (high activity) had been bullish, why is

the market now reluctant to go up?

If you take a logical approach to analysing the market and base your analysis on

an effort versus results basis, you will be on your way to becoming a successful

trader. Keep in mind that it is the underlying activity of ‘smart money that

provides the effort and the result for any sustained price movement.

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Figure 4

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Figure 5

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Figure 6

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The Up thrust/Down thrust

Up-thrust can be identified as a wide spread up bar accompanied by high

volume, that closes on the low. Up-thrusts are usually seen in a market that has

been rising, where the market has become overbought and weakness can be

seen in the background.

Down thrust can be recognized as a wide spread down bar accompanied by

high volume, that closes on the high. Down-thrusts are frequently seen after a

period of selling, just before an up-move. Note the bar must close on or very

near the high.

The dynamics of an up-thrust/down thrust are interesting – the rapid up-

move/down move brings in buyers/sellers and catches stops. The traders who

are already in the market, become alarmed and cover their positions.

Breakout traders rush into the market expecting a breakout only to have the

market retrace, stopping them out.

It is a common strategy to suddenly mark-up/mark-down prices to catch the unwary, this is often done on good/bad news, to trap you.

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Figure 7

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Figure 8

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Figure 9

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Figure 10

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Figure 11

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Narrow Spread Bars & High Volume

High volume Narrow Spread Bars can be seen when retail traders and others

have rush into the market before they miss further price move. This results in

a narrow spread bar because smart money has taken the opportunity to trade

against them preventing prices from moving. The result of this action can be

seen on your chart as a narrow spread bar with high volume.

Figure 12

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Figure 13

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Figure 14

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Testing Supply And Demand

Supply entering the market will act as resistance to any up move/rally, market makers can test supply by rapidly marking the prices down challenging bearish traders around to start selling.

The market makers can tell the amount of selling there is by the amount of volume

(activity) that can be seen as the market is marked down. If there is little selling on

the mark-down, we will see low volume, or low trading activity. High volume, (high

activity), shows that there is selling (supply) on the mark-down

On most occasions, a successful test of supply (low volume test) signals that the

market is ready to fall immediately, whilst a high volume test usually result in a temporary up move, and will be subject to a re-test of the same price area

again at a later time/date .

The same goes for testing demand, a successful test on low volume tell you that the market is ready to rise whilst a high volume test usually result in a temporary down move, and will be subject to a re-test of the same price area again at a later time/date .

When the market is testing supply any up-move dipping into an area or price

range where there was previous high volume (previous selling), which then

returns to close on, or near the high, on lower volume, is a clear signal to expect

lower prices immediately. This is a successful test.

Lower volume depicts that the amount of trading that took place on the mark-down was reduced, that now there is less selling, when previously there had

been a lot of selling. At this point, it is now important to see how the market-reacts to the strength seen in the testing.

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Figure 15

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Figure 16

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Figure 17

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Figure 18

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No Supply/No Demand

No demand is a narrow spread up bar with low volume that is lower than the volume on the previous two bars, it’s an even stronger signal if the bar closes off the high.

No supply is a narrow spread down bar with low volume that is lower than the volume on the previous two down bars, it’s an even stronger signal if the bar closes off the low

Figure 19

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Figure 20

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Figure 21

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Fake Breaks

Fake break also called fake breakout or Spring or Shakeout, is a manoeuvre used

to catch stops and trap breakout traders. It is often observed right before the

market is about to take off in a particular direction. Fake breaks can be a sign of

strength or a sign of weakness depending on the direction of the fake break,

Figure 22

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Figure 23

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Figure 24

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Stops and Take Profits

When selling, place stops either below the low or below the low of the no supply bar. Stops may also be placed 30 pips below the supply line

When buying, place stops either below the low or below the low of the no demand bar. Stops may also be placed 30 pips below the demand line

Take profit when selling after observing major signs of demand entering the market or observing the market pushing above and closing above supply line

Take profit when buying after observing major signs of supply entering the market or observing the market pushing below and closing below demand line

Also use tools like Fibonacci retracement and extension levels, support and resistance, past support becoming future resistance, divergence indicators etc. All these tools can be used to help you decide when to take profit.

Another technique you can use when trading is to move your stop to break-

even whenever the market has move a sufficient distance in your direction.

I tend to move my stop to break-even once the market has moved at least

25 pips in my direction or if I see signs that the trade is losing probability.

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No Demand/No Supply Entry

After signs of weakness or strength one may enter after the close of a no demand/no supply. One may also enter after the confirmation of the no demand/no supply

No demand is confirmed when a subsequent bar closes below the low of the no demand bar, this bar is call the confirmation bar. However if any bar proceeding the no demand bar closes above the high of the no demand, it becomes invalid.

No supply is confirmed when a subsequent bar closes above the high of the no supply bar, (confirmation bar). If any bar proceeding the no supply bar closes below the low of the no supply bar, it becomes an invalid signal.

Supply/Demand Line Entry

Supply line is the price level at which the market falls after a sign of demand entering the market is seen

Demand line is the price level at which the market rises after a sign of supply entering the market has been seen.

One may enter the market after seeing prices pushing above/below supply/demand line and closing above/below the line.

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Four Step Confirmation

STEP 1-- Look for signs of supply/demand coming into the market

STEP 2-- Look for tests on low volume (look for no demand/no supply)

STEP 3-- Look for push above supply line/below demand line

STEP 4-- Look for test of supply line/demand line on low volume (look for no demand/no supply)

Figure 25

Step 1 identify sign of weakness/sign of supply entering the market. Step 2 low volume test finding no demand. Step 3 close below demand line. There is no step four in this example however we see no demand candles (blue line) each time the market attempts to rise, further confirming the down move.

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We exited the market after seeing major sign of strength (SOS) and divergence on the momentum indicator.

Figure 26

Step 1, SOW identified, here we see a high volume up thrust. Step 2, market

enters high volume area finding low volume this is a successful test. Step 3, push

below demand line on low or normal volume we also want the candle that

pushes below demand line to close at or near the low. Step 4, market return to

test the DL finding low volume/no demand.

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Figure 27

Step 1, here we see a down-thrust producing the highest volume of the day. Step

2, low volume test producing no supply, step 3, close above supply line. On some

occasions the market may consolidate at the supply line/demand line, whenever

this happens you must ensure that you read the price action to know whether you

should close your trade or not. You must ask yourself am I seeing weakness or

strength. If you are bullish, ask yourself am I seeing high volume down bars with

bullish reaction, am I seeing no supply, down thrust all of which are signs of

strength.

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Figure 28

Step 1 confirmed, step 2 confirmed, step3 confirmed, step 4 confirmed and

divergence on the momentum indicator (high probability trade). There is a sign of

weakness at Step 3 as the candle that closes above the supply line has high

volume and produces a bearish reaction this takes probability off the trade.

However we later see the market closing above this sign of weakness on

decreasing volume. We do not want to see high volume at the highs, as this is a

sign of selling, signalling that the up move was sold into.

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Figure 29

In this example there is no step 2 confirmation following step 1 as high volume is still present on the test. Even though there is no step 2 confirmation the high volume down move produces a bullish reaction (SOS).

After step 3 is where this trade lost probability, we see two back to back high

volume up thrust which is a strong sign of weakness especially if it’s confirmed

on the smaller time frame. After seeing these two signs of weakness one

should either close out the trade or place stop at break even.

We see step 4 confirmation ND at the supply line, however this trade has already lost a lot of probability and in cases like these we should not look to enter the market at step 4

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How To Analyse The Market

When analysing the market always start from the largest time frame that is the

monthly time frame. Draw your trend lines and identify the major Fibonacci levels

as well as the major levels of support and resistance, is the market in an uptrend

on this time frame or is it in a downtrend. Is the market approaching a trend line,

has the market broken a trend line or has the market recently bounced off a

trend line. The next step is to analyse the one step lower timeframe, 2 steps

lower timeframe and 3 steps lower timeframe in the same fashion as highlighted

above.

When determining the direction of the trend on a particular time frame use a

larger time to get a better insight into the direction of the trend. Use the daily

charts to determine the direction on the 4hr chart and trade in the position of

perhaps 1-4 weeks. Use a 4hr chart to determine the direction on the 1hr time

frame and trade in the position of perhaps 1-4 days. Use the 1 hr chart to

determine the direction on 15 minute time frame and trade in positions of

perhaps 1-24 hours. Use the 15 minute chart to determine the direction on 5

minute time frame and trade in positions of perhaps 30 mins-6 hours.

Use the 5 minute chart to determine the direction on 1 minute time frame and trade in positions of perhaps 5 mins-3 hours.

Once you have determined the direction of the trend you should now analyse the

chart for signs of weakness (signs of supply entering the market) and signs of

strength (signs of demand entering the market). You should begin by analysing

the background of the chart, remember cause and effect, future market moves

are often easily predicted by proper analysis of the background.

The background is the area to the left of the current price, on most occasions it is

only necessary to analyse a few hours to a few days of background information.

Ask your self is the background showing signs of strength or signs of weakness. If

the background is showing signs of strength we say the background is strong and

if the background is showing signs of weakness we say the background is weak.

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The next step is to confirm the signs of strength /weakness that we have

observed. First start by identifying the signs on the 1 hour time frame, next go to

the 15 and 5 minute time frames to confirm the signs on the 1 hour. If you notice

a high volume up thrust on the 1 hour time frame with the highest volume at the

high. Then as you move to the 15 and 5 minute time frames you observe that

the highest volume is not present at the high of the market. This mean that the

up thrust you observed on the 1 hour time frame is not confirmed and even

though it is still a valid sign of weakness, the signal is not as strong as it would be

were the signs confirmed on the smaller time frame.

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It’s imperative that the high volume is observed at the high or top of the market

when confirming signs of weakness. If the high volume observed was as a result of

increased buying, increased effort to go up, we would expect the increase effort

to result in higher prices. If it does not, then there must have been something

wrong. The increase volume then must have been as a result of increased selling.

The same goes for signs of strength where it is important that the high volume is

confirmed at the lows and market bottoms.

Analysing volume signals can prove to be a bit tricky at times as you might

observe a low volume reading on the hour time frame only to observe a high

volume reading when you switch to a smaller time frame. In these cases its

important to draw you Fibonacci levels to see if the market is at a Fib zone, it is

also important to note the trend the market is in. Trading with the trend

requires less volume than trading against the trend especially when you are

trading off a Fib level.

Volume reading is also relative, what may seem like a fairly low volume reading may still move the market. You must look at volume reading in regards to the

volumes that you have observed over a particular time period. This mean that the highest volume of the day however low it may seem is of great significance

It’s also important to note that on most occasions the very high volume signal

that you observe on a chart are due to fundamental announcements. Therefore

it is of extreme importance to pay keen attention to very high volume signals

that are not as a result of fundamental announcements. It’s also imperative that

you understand that increasing volume is a significant signal even if it is low

volume. Increasing volume signifies an increase in activity hence it’s always

worthy of note

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Figure 30

4 hour chart showing a 61.8 Fibonacci bounce in an uptrend. Next step is to move to the smaller time frame and analyse the price action more in dept.

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Figure 31

Here we have the 1 hour time frame showing low volume at the bottom of the Fib zone. The market is in an uptrend so very high volume signal is not necessary to

move the market, knowing this you should move to the smaller time frame to get a better look at the volume signal.

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Figure 32

Now on the 15 min we see high volume entering the market at the low and prices

failing to close lower (SOS). We can also observe a step 2 confirmation followed

by a step 3 confirmation and off the market goes. Please be aware that if this

trade was counter trend the volume of the SOS might not have been sufficient for

a reversal.

Remember when trading with the trend the volume signal doesn't have to be very

high. What is most important is that the volume signal is at the low/high, the

volume signal is at a Fib zone and the volume signal is increasing (represented by

black bar). Let’s now look at the 5 minute time frame to get an even more precise

look at the volume signal.

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Figure 33

Now from the 5 minute time frame we can see that the highest volume in the region is at the lowest point on the chart. This confirms the volume signal,

smart money bought up prices at the low and as a result the market cannot fall below the low.

From this example it is evident that analysing the volume signal on the larger

time frame alone cannot give you the most accurate volume reading. As one can

observe that the volume signal on the 1 hour time frame was low and showed no

sign of high volume at the bottom of the market. It is essential then that before

placing a trade that you analyse the volume signal on the smaller time frames.

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Figure 34

In this example we have high volume at market bottom and in the background we can observe that the volume at the top of the market is low (SOS). We can also

observe a false break (SOS) at the Fib zone that is the 50-61.8 Fib level. Next step is looking for volume confirmation on the smaller time frame.

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Figure 35

On this 15 minute time frame we can see clearly that the volume signal on the 1

hour time frame is confirmed on the 15 minute time frame. We also get

background confirmation, confirming the low volume at the top of the market.

Next step analysing the volume signal on the 5 min time frame for further

confirmation.

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Figure 36

Here we have the 5 minute time frame further confirming the volume signal we

had observed on the larger time frame. It is typical for fake break set ups to not

have a step 2 confirmation however we have step 1 confirmation and step 3

confirmation. We can also observe a NS further confirming the trade. It is also

important to note that the candle that pushes and closes above the supply line

has relatively low volume and closes near the high (SOS).

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Trader’s Checklist

Time of day is another very important aspect of trading. It’s best to avoid

trading at low volume hours, these are end of session hours. The best times to

trade are early in the sessions, like 8gmt-20gmt for the London and New York

session and 18gmt-21gmt for the Sydney and Tokyo session.

It is easy to understand why time of day is important, for example, you are trading

the no demand at the end of a market session. Now how do you know for sure

the decrease in volume you are observing is as a result of a lack of interest by

buyers? Its end of session chances are the no demand you are observing is cause

by a general decrease in volume in the market due to the time of day.

On the other hand if you observe a no demand at the beginning of a session when

we expect volume to be high and the market to be lively. This is a stronger

indication that buyers are not interested. Another reason to avoid taking trades

at late in the session, is because the market can be more easily manipulated at

dull hours when the volume is low. The market can hunt for stops more easily

because the volume in the market late in the session can get really thin.

The answer to all the questions below should be yes before you enter a trade.

•Have you seen more than 1 sign of weakness/strength?

•Have you seen confirmation of the weakness/strength (4 step confirmation)?

•Have you seen any no demand/no supply bar or low volume test?

•Does the trade require a risk of at most 1% of your account?

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•Is your risk to reward ratio more than 1:2?

•Have you checked to see if there are any fundamental announcements coming out? You can check for fundamental announcements by going to fxstreet.com and checking the economic calendar, this shows a list of economic data that may affect the market and your trade.

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