Indicator Volume
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Thread: Indicator Volume

  1. #1
    Trader Doge's Avatar
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    Indicator Volume

    First we begin with some theoretical stuff: there are two kinds of Volume we can put on our charts - Real or Tick Volume.
    Real volume shows the actuall currency/stock/metal exchanged for the period of a particular bar, Tick Volume shows the number of price changes for the period, which is approximately the number of trades made. Some platforms take in account two consecutive ticks at the same price as one and that is where the 'aproximate' part comes from. In Forex of CFD markets real volume is not available, at least for us poor retail traders. Real and Tick volume are not the same, but there is a connection between them - the more trades made the more volume exchanged. In most cases that is more than enough for technical analysis.

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    Trader Doge's Avatar
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    The volume bar has no value by itself - it can only 'start talking' when compared to the neighbor volume bars or some average. It is also valuable to compare average volume from current session with average volume from the same trading hours from other days.
    Volume also is not important solely by itself, but mostly about 'underlying' the price action.
    For example on this chart we see a big bull bar with big volume - even seeming like 'excessive' and after that there is no follow-through - price action dries up, falls easily below half the bull candle and there is very little volume when it would be supposed to make a higher high and go up (this is in the circles). Then follows the pin par (in the rectangle) - big stable volume there could mean there is some demand and we could expect a range around the big bull bar (from the circle). but then there is no follow-through - price action is weak for the bulls, there is little volume, second three bars fall bellow the line of the lows of the first three bars - and next thing is the pin-bar demand/support is broken.

    http://i.imgur.com/Q6YBzQ4.png



    Volume bar cannot give signals, it only gives hints. It doesn't work alone by itself, it only adds or subtracts value to other indicators - including price action. It is best used with price action, because there is bar-to-bar dependance. If used with complicated indicators it might be needed some time adjusting, as averiging maths sometimes shift the correct indicator value a bar or two back or forth.



    Here is one particularly specific example. This mostly works on 1 minute chart. An excessivey big price bar with little or no shadows (some markets like eurusd or dow would need almost no shadow, others like dax and gold allow to have some) and excessively big volume bar (at least twice than the others around and quite bigger than the average from other sessions). If there is not some big trend most of the time such bar means a local top or bottom. It is a good place to exit a position, but not to enter - as this doesn't give a clue what might be next.

    http://i.imgur.com/E1EWFm1.png

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    Last edited by Doge; 05-17-2015 at 01:23 PM.
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    Registered user nsawork's Avatar
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    Yes when we are trading we must know how much Liquidity is present in the markets. If we are aware of the trading volumes that we will know whether we should trade or not given the amount of trades hat are being done.

    It is mostly seen that during the time of the news we have more Trades that are coming and this is why we also see some of the spikes during those trades

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    Trader Doge's Avatar
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    Yeah, liquidity analysis is also more possible with Volume.
    There is the technique 'Market Profile' which can be done by price or by volume - it is even better to gauge liquidity at certain level both during news or on a daily/weekly basis.
    There were some guys MarketDelta that offered free quotes of currency futures with real volume included and their own custom indicators for analysis. There were even some free metatrader 4 indicators, including Market Volume Profile adjustable to FX quotes (there are a few ticks difference at the begining of the futures contract because of the swap).

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    Trader Doge's Avatar
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    Another use of the Volume indicator is a 'Volume dry-up' - when price action goes into a trading range there is usually some activ poinits with large bars and big volume. After some time price action shrinks and volumes gets low - this is the time we can start to look for the begining of a new impulse and breakout from that range. This event can be a good conformation if we use trading range breakout systems - rectangles, wedges and so on.
    This 'Volume dry-up' is useful also when trading news on 15-second charts. There is the sudden rise of volatility when the newsline is released which eventually ends - this is most clearly seen by the shrinking of price action on the 15-second chart and decline in average volume. This can be different from the prevous type as it could be only the news activity that is over - the 3 and 5 minute charts can be quite active after such event.

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    Registered user nsawork's Avatar
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    Quote Originally Posted by Doge View Post
    Another use of the Volume indicator is a 'Volume dry-up' - when price action goes into a trading range there is usually some activ poinits with large bars and big volume. After some time price action shrinks and volumes gets low - this is the time we can start to look for the begining of a new impulse and breakout from that range. This event can be a good conformation if we use trading range breakout systems - rectangles, wedges and so on.
    This 'Volume dry-up' is useful also when trading news on 15-second charts. There is the sudden rise of volatility when the newsline is released which eventually ends - this is most clearly seen by the shrinking of price action on the 15-second chart and decline in average volume. This can be different from the prevous type as it could be only the news activity that is over - the 3 and 5 minute charts can be quite active after such event.
    It is very good to see how the Volume Indicator works so that we will know if fully before we start using it in our trades. Most of the time when the Major news are coming in the Forex markets we can see if the amount of Volume that is being traded is changing.

    And that will certainly help us in making the Right kind of trading decisions

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    Trader Doge's Avatar
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    I'm not even sure if it correct to call in 'indicator', as it is actually a part of the incoming market information - like the price itself.
    As a trading tool it is more of a helper than a main base for desicions - in most situations its best use is to confirm situations shown by another tools - like indicators, price action, geometric models etc.

    These that I share are some typical situations and a desicion including Volume can save pips and dollars - the 1-minute climax can help to make a close of our position a pip or two from the actual extremum of the price action - which is quite amazing and incredibly satisfying.

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    Trader Doge's Avatar
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    One more good thing to know is that not all quote streams are the same - some brokers (especially mt4) offer interpolated or filtrated data which sometimes gives better fills (most notably on breakouts) and can be a good thing to the trader, but it doesn't give accurate Tick Volume. Some brokers add one more digit on some markets (probably for the sake of equallity in products they offer to their clients - some markets are more expensive than others and adding a digit gives chance for trading smaller volumes - which is also good thing for the trader, but invalidates the Tick Volume).
    Generally speaking what most of us poor retail traders trade is cfd-s - not the actual markets. That is what the brokers can offer for less than 1000 dollars accounts. Again - it is a good thing for us as we can learn to trade for very low costs, but this also includes quotes that differ from the actual market. While for the price chart it doesn't make a big difference (price bars are generally the same - they have to be or we poor retail traders will employ lots of arbitraging between brokers) Tick Volume is in many cases fundamentally different and loses most of its value.
    If our broker doesn't give us accurate volume quotes, but we want to employ Tick Volume most of the time the best thing is to open some free demo in another broker and make our analysis there. I myself do this as my current broker only offers MetaTrader 4 and I prefer MetaTrader 5 and NinjaTrader for analysis as they have more timeframes. The downside might be to keep two (or more) platforms open, but there is certanly an upside - you can keep the trading platform clean and organized solely for the comfortable opening and managing trades (no need for big chart windows and employed indicators on them). And if you want to try some new stuff there is no need to mess up the trading platform.

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    Trader Doge's Avatar
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    Here is one more nice example how Tick Volume completes the price action timeline: this is a corective movement down, it is clearly seen on the 3-minute chart. On the 1 minute chart we can see how exactly turns out the bottom - there are big bear bars, but there is no volume in them, instead it is the bull bars right next to them where the volume is (the two local bottoms marked with the vertical lines).
    And then price actions starts going up - in the rectangle we see approaching, reacting and retesting the resistance that defines the bear correction - there is little volume on both the bull and bear bars there - and naturally price action jumps over the resistance and proceeds up.

    http://i.imgur.com/sNGU65B.png

    http://i.imgur.com/pB0sXtG.png

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    One more good use of Tick Volume is the possibility to build a Tick Chart and use instead of (or in addition) to the Time Charts that we all (probably) use.
    The advantage of the Tick Chart is that it adjust itself to the rising or shrinking of activity and volatility - it shows in more detail the more active moment of the price action and skips the less active.
    For example a Tick Chart of say 70 pips might represent a timeframe closer to 1 or 2 minutes in normal market conditions. If some major news are released and market gets suddenly active and volatile the same 70 pips will pass much faster making the 70-tick Chart look closer to a 30 or even 15 second timeframe.

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