Unlike traders of stocks and futures, Retail Forex traders have historically not been able to rely upon volume data as an indicator in determining when to enter and exit trades. This is unfortunate, as volume data can be far more predictive of future price movements than pure price-based technical analysis. There might be ways you can get a better picture of where the buying and selling is taking place beyond what you already know.
There are three possible sources of volume or volume-related information that a retail trader might be able to utilize in their trading. Let’s look at the running order of how easy they are to access, running in order from the hardest to the easiest.
Depth of Market (DOM)
Few retail Forex brokers offer this feature, although ECN brokers often do. This feature shows, at any given moment, the pending orders to buy and sell an asset and at what price. It is usually a “ladder” shaped graphic, with the quantities shown against each price above and below the current market price.
Some versions of this also include a “market profile” overlay that visualizes the quantity that has already been bought or sold at price so far during the trading day or session.
It is important to bear in mind that as there is no central marketplace in spot Forex, the data presented within a Depth of Market ladder would logically be particular to that broker. It follows that the larger the volume or orders typically processed by that Forex broker, the more useful their Depth of Market data would be. This is why a lot of traders that reply upon this data heavily in their trading prefer to trade on major Futures exchanges such as the, where Forex futures are traded in large quantities through a centralizes exchange. It is usually not as liquid as spot Forex, but reliable volume data exists there.
So how does the Depth of Market come in useful in trading? Almost all trading professionals will say that it is an essential tool when undertaking very short-term trading. In fact, they will tell you it is far more useful than a typical technical chart. This is because at a glance you can see, by looking at the quantities of orders at each price, who is moving the market right now: buyers or seller, or whether a market is very finely balanced or just relatively inactive. The idea for smaller traders is to wait for large orders to come in and enter as close to those orders as possible, piggy-backing off the very big players. When you see large sell orders a few ticks above and large buy orders a few ticks below, you have a range to trade. Of course, it is not as simple as that, as “spoof” orders may be entered and withdrawn in the blink of an eye: not every order entered gets executed. Generally, though, watching a true Depth of Market ladder will give you a valuable insight into how a market actually works, and of course can be used in conjunction with technical analysis, with the order sizes a kind of confirmation that a technical turning point or breakout level is truly having the anticipated effect upon the price.
Increasingly, more and more Forex brokers are offering real volume indicators within their technical charting software. This is not as good as Depth of Market data, and as discussed previously the larger the broker the better, but it can be useful, and is the next best thing. If the broker splits the volume indicated into buying and selling, you can see at each individual time period not only the quantity of the buying and selling, but whether more was bought or sold. So for example, if the price is going up and hits a level where you think it will turn, and you see that the selling volume becomes much heavier than the buying volume, that can give you a higher-probability short trade entry.
Most retail Forex brokers still do not offer either Depth of Market or Real Volume data. So, is there any substitute for this data that can still come in useful and is widely available? The answer is yes to both of those questions, but this is an area that needs to be approached with caution.
There are a range of typical volume-style indicators available in most charting platforms, for example the on-balance volume indicator. They are all essentially variations on tick volume, so I recommend using a pure tick volume indicator. If you are using Metatrader4, it is easy to find some nice tick volume indicators for download that will color the candles on screen depending upon whether they have relatively higher or lower tick volumes.
Tick volume is just the number of price movements made by the tick chart in the period of time covered by the candle. It is not accurate and does not necessarily reflect real volume, but a large tick volume at an anticipated support or resistance level can indeed give you a clue about the future direction of the price.