Volume indicator as the basis of a trading strategy

Volume indicator as the basis of a trading strategy

As you know, “the longer a whale swims against plankton, the more nourishing it is.” A similar tactic is applicable to the Forex market, so before opening it is advisable to make sure where you are – on the side of the plankton or the whale. Not everyone can grow to a whale, but it is quite possible to swim next to it if the volume indicator is used correctly.

For the first time the hypothesis about the relationship between the current quotation and the level of demand and supply, which is actually shown by the volume, was expressed by Charles Dow in his famous theory. And, despite the fact that the sides of technical and candlestick analysis continue to assert that for effective trading, a graph and mathematical indicators are enough, everything depends on the change in volumes.

Basic concepts

As applied to financial markets, the term “volume” includes the total number of contracts for a trading asset (currency, stock, futures, option, derivative) per unit of time of a trading session or day. There are two types of data used:

  • Exchange (real, “clean”) . Both the number of deals and their money volume, open / close levels are visible
  • Teak . Only the number of transactions per unit of time.

A volume indicator that works with stock data gives the best results, as a trader can assess the real interest of the market in specific levels and price zones, but as we will show later, you can trade profitably using a tick histogram.

Don’t put too much weight on precise numbers, especially in Forex. The dynamics of the change in activity is more valuable, and you need to watch how it relates to other tools and patterns. First of all, pay attention:

  • the size of the bars of the histogram : small, in the middle range, increased. We analyze at least 10-15 past periods;
  • information on the transaction. For example, open interest in derivatives such as currency futures. You can see not only the levels where there are most of the contracts, but also who currently dominates the market: market makers , small players, speculators or hedgers.

Thus, the volume indicator for MT4, first of all, looks for various “ abnormal ” situations that have a significant impact on the market: entry and exit of “smart” money, changes in the balance between buyers / sellers, determining the truth of level breakouts.

Analyzing tick data

Analyzing tick data

Volume indicators are usually histograms, where bars indicate an increase or decrease in market activity per unit of time. Each deal, regardless of its size, represents one “tick” and the more there are in a unit of time, the more active the players. But there is a significant drawback – the foreign exchange market, unlike the stock market, is decentralized , so the maximum that a small and medium player can see is the situation with a specific Forex broker.

As mentioned above in the section of basic concepts, it is necessary to estimate the volumes of the current bar and the previous one: how much more or less, the percentage of deviations from the average on older and lower timeframes. Remember that from the point of view of the indicator, all ticks are equivalent, let it be a cent account or a millionth deal.

But, in reality, their impact on the market is fundamentally different and you can often see how large Forex players have already reversed the trend, and the dynamics of tick volumes persists or changes with a large delay.

A logical question arises, will such trading using the tick volume indicator for MT4 be profitable? Even with certain restrictions, it can be argued that yes, there will be:

  • volume indicator for MT4, which means that the number of deals ( ticks ) is growing, such an increase in activity always has a hidden reason and it can be assumed that the trend will continue: the trend will continue or there will be a breakdown of a significant level, a sideways range. Naturally, additional confirmation will be required, especially with a flat.
  • when, at low volatility, sharp up / down histogram changes begin, this means that there is an accumulation of open interest, both pending and “real”. Such volume dynamics are usually observed before the start of a new trend.