Background first, bar second

The four phases

Wyckoff described a cycle and VSA keeps it: markdown, accumulation, markup, distribution, and back to markdown. Here it is drawn as a bar sequence with the phases labelled.

• Markdown. Price falls on expanding spreads and rising volume. Down bars close on their lows. Rallies are short and thin.
• Accumulation. The decline ends on a climax, the range narrows, volume dries up, and the last dips into the range find no sellers. The bars marked quiet and test are the tell.
• Markup. Up bars widen and close high on rising volume. Dips are shallow and quiet.
• Distribution. The mirror of accumulation at a top: a buying climax, a range, drying volume on rallies, then the break.

You do not need to name the phase with certainty. You need to know whether the last significant volume event was strength or weakness, and whether price has done anything to contradict it since.

Why background flips the meaning

Take the narrow, low volume bar, bar B from part 2. After a selling climax and a rally, a small down bar on tiny volume means the dip attracted no sellers. That is a no supply bar and it says the rally can continue. After a buying climax and a drop, a small up bar on tiny volume means the bounce attracted no buyers. That is a no demand bar and it says the drop can continue.

The two bars are pixel for pixel identical. If you read them without background you will be right half the time by accident, which is worse than being wrong, because it feels like skill.

Establishing background on gold in practice

A workable routine, top down.

1. On H4 or H1, find the last bar with the largest volume in view. Was it a down bar that closed off its low, or an up bar that closed off its high? That is your last major event: strength or weakness.
2. Has price since moved in the direction that event implied? Strength followed by higher lows confirms it. Strength followed by a new low on rising volume cancels it.
3. Mark the range. Where is the climax low or high, and where is the reaction against it? Everything inside that box is the background you are reading against.
4. Only now drop to M15 and read individual bars.

This lines up with how the market structure articles on this site read swings: the higher timeframe decides bias, the lower timeframe decides timing. VSA adds the participation column to both.

The law of cause and effect, in practice

A short base gives a short move. A long base gives a long one. When you see a climax followed by a range that took two bars to build before breaking out, be suspicious of the breakout; there was no cause. When the range took thirty bars and the volume dried to nothing on the last dips, the breakout has something behind it.

This is not a precise ratio and anyone selling you one is selling. It is a habit: before trusting a move, look at how much preparation preceded it.

What contradicts a background

Strength is cancelled by a lower low on rising volume with a close on the low. Weakness is cancelled by a higher high on rising volume with a close on the high. Anything less than that is noise inside the range, and noise inside the range is exactly where tests happen. Do not throw away a valid background because one bar wobbled.

Course navigation. Previous: Part 2, Reading one bar. Course index: VSA course for gold. Next: Part 4, Signs of strength.