Test and Upthrust in VSA Forex Trading Strategy
In the realm of forex trading, the Volume Spread Analysis (VSA) strategy offers traders an insightful approach to market dynamics by analyzing volume, price spread, and price action. Among the crucial concepts within VSA are “Test” and “Upthrust.” These elements provide significant clues about potential market reversals and trends. Let’s delve into what these terms mean and how they can be applied in forex trading.
Test in VSA
The “Test” is a concept used in VSA to identify potential market reversals. It refers to a specific price action pattern where the price tests a previous level of support or resistance to confirm whether it still holds.
Characteristics of a Test:
Volume Analysis:
During a test, the volume is typically lower compared to the volume seen during the initial breakout or trend movement. This decrease in volume suggests that the market is assessing whether the previous price level can hold.
Price Action:
A test usually involves a price retracement or pullback to a critical level. The market revisits this level to check for strength or weakness. If the price holds, it indicates that the level is strong; if it fails, it signifies potential weakness.
Confirmation:
For a test to be valid, there should be confirmation of strength or weakness. In an uptrend, a successful test would involve the price holding above a previous resistance level, while in a downtrend, it would involve the price staying below a previous support level.
How Traders Use the Test:
Traders look for tests to confirm their entry or exit points. For instance, if a currency pair has been trending upward and then retraces to test a previous resistance level, traders may watch for a successful test to enter long positions. Conversely, a failure to hold the level could signal a potential trend reversal, prompting traders to consider exiting or taking short positions.
Upthrust in VSA
The “Upthrust” is a key reversal signal in VSA and indicates that a price move may be nearing its end. It represents a situation where the price briefly spikes above a previous resistance level but fails to sustain this level, leading to a sharp reversal.
Characteristics of an Upthrust:
Price Action:
An upthrust involves a price spike above a resistance level followed by a rapid decline back below this level. This pattern suggests that buyers were momentarily in control but were unable to maintain the price at the higher level.
Volume Analysis:
The volume during an upthrust is typically high. This high volume suggests that there was significant buying pressure during the spike, but the inability to sustain this pressure indicates a potential exhaustion of buyers.
Confirmation:
For an upthrust to be considered valid, it should be followed by a significant price decline, confirming that the previous resistance level has turned into a new support level or that the market has become bearish.
How Traders Use the Upthrust:
Traders use upthrust patterns to anticipate potential reversals. If an upthrust occurs at a key resistance level and is followed by a decline, traders might interpret this as a signal to exit long positions or to enter short positions. The upthrust can be particularly useful in identifying market tops and signaling the end of an uptrend.
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