Many traders consider volumes to be unreliable, and to some extent this opinion is correct.
The volume we see on our charts is not the true actual volume, it is the tick volume from the broker’s platform. In today’s article, you will find information on how you can use tick volume to better understand what is happening in the market.
The essence of the tick volume
Tick volume is when 1 tick equals 1 trade, which means that if you see a large spike in volume in the market, it tells you that many traders have either placed trades during that time frame or have closed trades.
The true tick volume cannot be known in the forex market due to the fact that there are many different exchanges around the world where trading takes place. When people become aware of this, they tend to shy away from understanding the scope and information that it reveals. Knowing what the volume values mean can be very helpful in your trading and understanding of the market.
How reliable is Forex tick volume
There is a common misconception that volume cannot be reliably used in Forex trading for two reasons: First, there is no central exchange and therefore no official volume data. Secondly, when you look at volume data on your Forex platform, you are actually seeing “tick volume” and not the actual traded volume, such as 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 particular bar. But the correlation between tick volume and actual trading volume is also incredibly high. In 2011, Caspar Marni, head of Marney Capital and a former trader at UBS and HSBC, analyzed the actual volume and tick volume in Forex. He used data from eSignal, EBS and Hotspot. He calculated that for the pairs under study, the correlation between tick volume and actual volume exceeds 90%.
Traders usually use the following rules for analyzing volumes:
- If prices rise and volume rises, the market is strong.
- If prices rise and volume declines, the market is very weak.
- If prices fall and volume rises, the market is weak.
- If prices fall and volume decreases, the market is strong.
Other rules you might find useful:
- In a bull market, volume tends to increase with growth and decrease with reaction.
- In a bear market, volume tends to increase with a decline and decrease with an increase.
- Trading volume usually rises sharply at the tops and bottoms of the price chart.
Calculating the tick volume
An intraday chart is required to investigate tick volume. The calculation to study the tick volume simply counts the number of ticks during the interval specified on the intraday chart. For example, if you are tracking a 5 minute intraday chart, tick volume research counts the number of ticks that occurred during that 5 minute trading interval.
The activity of a futures instrument directly affects the study of the tick volume. In slow moving markets, this research is almost useless.
Institutional money, or smart money, is needed to move the market and is reflected in tick volume. Forex tick volume can be seen as an accurate indicator of institutional strength or the strength of smart money.