Using Volume to Win 75% of Trades

Huzefa Hamid

For a currency to be traded and for its price to move from one level to another, volume is required. Or put another way, volume is the gas in the tank of the trading machine. However, volume has often been overlooked in the study of Forex charts. The focus has been more on price action alone.

Why is volume important to understand?

Volume is required to move a market, but it’s a particular type of volume that really matters: institutional money, or “Smart Money”, which is large amounts of money being traded in a similar way, thus affecting the market greatly. Only volume shows when price is being affected by this type of activity. Knowing how institutional money operates, we are able to track those traders and trade along with them, so that we’re swimming along with the proverbial sharks rather than being their next meal.

Is Forex volume reliable?

There is a common misconception that volume cannot be used reliably in Forex trading for two reasons: firstly, there is no central exchange and therefore no official volume data. Secondly, when you’re looking at volume data on your Forex platform, you’re actually seeing “tick volume”, and not actual volume traded, such as the volume with a stock chart.

“Tick volume” measures the number of times the price ticks up and down. This is an excellent indicator of the strength of activity in any given bar. But also, the correlation between tick volume and actual volume traded is incredibly high. In 2011, Caspar Marney, head of Marney Capital and ex-UBS and HSBC trader, conducted an analysis of actual volume and tick volume in Forex. He used data from eSignal, EBS and Hotspot. For the pairs he studied, he calculated the correlation between tick volume and actual volume is over 90%. 

 

 

So the question is: How do we go about tying in volume with price action?

The study of volume with price started in the early 1900s with a trader by the name Richard Wyckoff. His research, then known as Wyckoff Analysis, developed into what is known today as Volume Spread Analysis (or “VSA” for short).



Not all VSA traders or techniques are the same. Some are incredibly software driven and complex, whereas I like to keep it simple.

This simpler approach yields results. Experientially speaking, a success rate of 75% and more is not uncommon with very few consecutive losses.

A simpler approach is reflected in the charts. We have price candles, volume bars, and... that’s it! We use the 50% & 61.8% Fibonacci lines and simple support/resistance to help pin entries, but nothing more.

To summarize:

1. Institutional money, or “Smart Money”, is necessary to move a market and is revealed in the volume bars
2. Forex tick volume can be read as an accurate indicator of institutional or Smart Money strength
3. VSA, when it’s kept simple, can be applied (and taught) more easily with win rates of 75% and more

What’s next...?

In the next article in this series, we’ll look at some examples of VSA setups that we use to give us clean entries.

Tick Volume FAQs

What is a tick in forex trading?

A tick in Forex trading is the smallest possible unit by which the price can change. It is the same as the smallest possible unit of price which is always 1 pipette (0.1 pips).

How do you do a tick chart?

Almost all trading platforms, including MetaTrader 4 and MetaTrader 5, offer tick charts as part of their charting package. In MetaTrader 4 just go the “Market Watch” view and click on “Tick Chart”.

How do you read the balance of volume?

The larger the value of the on-balance volume indicator, the more the price is predicted to rise, whereas the lower the value, the more the price is predicted to fall.

How do you trade volume?

Usually when price seems to peak at a high while selling volume is also abnormally high, that is a sell signal, while when the price seems to be bottoming at a low while buying volume is also abnormally high, that is a buy signal.

Huzefa Hamid

I’m a trader and manage my own capital. I trade the major Forex pairs, some Futures contracts, and I rely entirely on Technical Analysis to place my trades. Today, I am also a Senior Analyst for DailyForex.com. I began trading the markets in the early 1990s, at the age of sixteen. I had a few hundred British pounds saved up (I grew up in England), with which I was able to open a small account with some help from my Dad. I started my trading journey by buying UK equities that I had read about in the business sections of newspapers. The 1990s were a bull market, so naturally, I made money. I was fortunate enough in my early twenties to have a friend that recommended a Technical Analysis course run by a British trader who emphasized raw chart analysis without indicators. Having this first-principles approach to charts influences how I trade to this day.

Did you like what you read? Let us know what you think!

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3 User comments
sameh
2020-07-16 11:05:19Z

Hi There,
is there any technique using tick volume and forex indicators tools like fiobananci help to predict the price .

thanks alot.

Huzefa
2012-10-31 23:03:55Z

Hi nswpro,

Send me an email on huzefa@theforexroom.com and I can fill you in on some of the progress we've made with volume following this article.

Thanks :)

nswpro
2012-10-30 17:41:53Z

Thanks for sharing, waiting for your next article in this series!


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Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Comments including inappropriate will also be removed.

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