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Forex Market

Is Volume Enough to Beat the Big Banks?

Traders hoping to become successful at forex constantly strive to improve their trading skills and, even more so, the variety of indicators that they use in trading. While the list of indicators is difficult to number precisely, forex enthusiasts often look for indicators in the hope of acquiring specific information. Volume, one of such important aspects of the forex trading experience, does not only pose as a relevant but also necessary item of information that gives traders a green light to enter a trade. Although volume indicators are many and are generally assumed to be a crucial part of each trader’s algorithm, this variety leaves much room for equally varying degrees of success. Naturally, in connection with this topic, the question of whether we can use indicators such as the Depth of Market or the DOM indicator to obtain more information about the overall market activity and be ahead of the big banks comes along.

DOM Indicator

DOM is popularly described as a very potent indicator that has been promised to provide traders with the potential to stay on top of the competition, which explains the high search frequency for this topic on Google. While still part of the MT4, this tool is located outside the common list of indicators and can be accessed by pressing ALT+B or clicking right and scrolling down. With regard to its performance, simply put, this indicator gives traders insight into the price levels with the heaviest volume. All the information DOM presents traders with stems from the brokers’ data that understand exactly where the clients’ orders are at any given moment. However, while sharing this information with others, the question of whether this allows us to trade like the big banks, or in other words have equal power, still remains unanswered.

Any trader interested in accessing the information discussed above can easily discover a price level with an abnormal amount of volume with the help of DOM, which can indeed seem quite appealing to anyone aspiring to become a successful and affluent trader in the forex market. Nonetheless, issues arise once we become aware of the fact that any dealing desk broker’s information is limited to levels and does not stand for the overall volume. Therefore, if a trader is interested in gaining an understanding of the volume and how the market is going to respond to any strange concentration at any point in time, this indicator already seems to be falling behind its promised ability.

Whereas many traders use DOM to enter trades, as a simplified version of such tools, this indicator also fails to do everything else a trader should expect from a fully functioning indicator. If we take into consideration the facts that traders need indicators for three purposes – to tell them whether they should go long or short, to help them with money management, and to assess if there is sufficient volume, to begin with, it becomes apparent that DOM is far behind satisfying all criteria that any trader should hold on to while using indicators. What this further entails is that not only the indicator in question cannot perform well but that volume alone makes only one of many relevant data that makes us feel assured that we can proceed with the trade. 

Trade Volume

When one is looking into the volume at any point in time, he/she should also be aware of the fact that seeing the list of the prices is not indicative of the overall volume. For example, a dealing desk broker such as Oanda will even fail to do as much because the only item of knowledge one actually acquires, in this case, is the numbers, which are highly unreliable and insufficient for determining the direction of a price. Even if traders choose to use other indicators to access volume-related information, they in fact still never acquire the data on the long-term volume, which directly questions the sustainability of any given currency pair one may be interested in. Therefore, the only tool that can grant this type of information that goes beyond current values is an actual volume/ volatility indicator as DOM simply is not of much use in this respect.

In order to understand any given information concerning volume, traders need to learn how to read the numbers they are presented with. For example, should a trader see that the DOM indicator reveals a price that is several pips higher, he/she still cannot fully trust the indicator or what numbers it is giving. Such feeling originates from the fact that some of the crucial questions are still looking for an answer, as we do not truly know anything about the type of orders that comprise this volume, whether they are limit or stop orders, or if the majority is entering long or short trades at the time. The missing information is much required as qualitative support owing to the fact that numbers alone have no meaning unless we are able to interpret them meaningfully.

Long and Short Trades

Traders should also be invested in discovering the predominant percentage of long and short trades because it will help them determine the correlation between volume and the types of trades forex traders are typically entering at the time. In addition, only once they get hold of such information will they be able to tell if the big banks will react at all because the main requirement for their involvement is precisely the impact volume has on the above-mentioned percentage. Unfortunately, the DOM indicator is unable to provide the data required and traders will never be able to tell the quantity of long and short trades or the price level above or below either, which makes the use of this indicator increasingly futile. 

Aside from understanding volume, its relevance in trading and the type of information traders need to possess so as to expect any success in forex, trading should generally not be intended to beat the traders’ greatest competition – the big banks. The reason for this remark lies in the understanding that the majority of traders attempt to do exactly what the big banks are doing and such an approach is exactly what makes so many traders lose most trades and accounts. The role of the big banks has always been clear and attempting to outsmart the one entity with more information than anyone else in the forex market possesses at any given time is a sure way to experience great losses. Hence, in order to beat the competition, you should learn how to use and interpret the information you come by rather than strive to be in the midst of the greatest concentration of activity in the chart.

Understanding Market Activity

The focus on the numbers has, as we explained above, never been the best of allies simply because we do not really understand the activity even when we can see that the concentration is extremely high. There is a number of indicators that can provide the same types of information, yet they lack the key ingredient to really be of any use. Interestingly enough, much of such data actually reflects past activity, which can only confuse you and blur your vision with regard to future activity. Therefore, the ability to see heavy trading does not reflect true volume nor does it indicate any future development. The sole reliance on indicators in the hope of them fulfilling all our intentions, goals, and needs is not going to lead to sustainable success and the same can be said about the reliance on volume alone.

Many traders are passionate about beating the competition when, in fact, their greatest opponent is their own lack of knowledge or understanding. In the forex market, we can say that everyone is fighting their own battle, so we cannot really discuss competition as we can do in the world of sports. Fighting against the big banks in the literal sense has been proven to be in vain, but understanding how to rise above their radar and focus of attention is most likely to bring you to where you want to go.

In order to achieve the expertise of not falling in the majority group, both in terms of the concentration in the chart and the number of people losing, traders must learn to take the road less traveled and attempt to take a different approach. As the use of one indicator alone, focus on one aspect such as volume, reliance on numbers alone, and hope to outsmart the big banks all seem to be inadequate, traders can turn to some other highly effective activities that have a much greater chance of helping them succeed long-term. The intention to grow and ensure sustainable development by far outperforms any quick fixes the majority of traders are interested in, which is why indicators such as DOM are so often used and why so many traders keep making the same mistakes.

Instead of putting all of your eggs in one basket, strive to dive deep into the psychology of trading, understanding why you keep experiencing losses and invest in money management so that you are a stable and balanced trader first and foremost, and the success will follow. Traders commonly assume that their careers should reach a peak the moment they come up with an algorithm, but the reason they still fail lies in the lack of understanding that some criteria are far more important than using the right tools.

Challenging Traditional Beliefs

Another important piece of information regarding the volume is that traders always believe that the higher the volume, the greater the success. Nonetheless, low volume, which is a usual part of the natural oscillations in the forex market, can allow traders to learn about the nature of the market and invest in testing their systems. Human beings can get extremely greedy, but forex requires a different perspective from its participants who are intent on reaching the expert level. In that respect, the greatest goal is not only to gain wins but also to mitigate losses and the same broad perspective can allow traders to see outside the narrow world of perfect tools and quick solutions.

And, finally, to return to the title of this article Is Volume Enough to beat the Big Banks?, traders should by now see through this the ideology and beliefs forming the basis of this question. Neither volume nor a volume indicator can be said to be the sole savior in the battle, especially when the battle is similar to that of Don Quixote. What you as an aspiring forex trader can do is learn to interpret the numbers you obtain and work on yourself as an individual, and any desired success will surely stem from these fruitful and sustainable decisions. 

Categories
Forex Market

The (Far Too Often) Understated Importance of Volume in Forex Trading

Then we will answer the following questions: Why is the volume of transactions in the stock market so important? What are the basic concepts of volume analysis? What exactly is volume analysis? What is behind this analysis? Why do professional operators pay so much attention to the volume of trading and what is the benefit of their analysis?

The Path to Volume Analysis

The first steps of newcomers to the stock market usually consist of: opening a demo account, or with real money, on a broker and downloading a platform like Metatrader. A posteriori begins the great experience of using the strategies and the search for the Holy Grail.

Beginners often fail because they trust the advertising promises of brokers, as they expect to make big profits and quickly. Of course, these expectations are disappointing for most beginners. Efforts to recover increasing losses by increasing positions will only result in a complete sweep of your accounts.

Therefore, many newcomers leave trading without money and frustrated soon after starting their trading careers. After all, only the youngest, most motivated, and persistent traders try to find a sensible way to succeed on the stock exchange, which often leads to volume analysis.

What makes the volume indicator different?

The relationship between supply (in red) and demand (in blue) is the basis of trading. The intersection of both curves shows a fair price. The absolute majority of technical analysis indicators (moving averages, MACD, stochastics, RSI, Bollinger bands, and many more) are calculated on the basis of historical prices.

The volume indicator, on the other hand, works differently: the special feature of the volume is that it leaves the price out of the calculation. The volumes do not pass through formulas but are delivered directly: in tics (each tic corresponds to an executed operation), in absolute terms (a series of executed operations), or in money (sum of the costs of executed operations).

The first type of volume, the volume in tic is mainly known by Metatrader users. Volumes in absolute and financial terms are real volumes of transactions provided by official markets in real-time.

In principle, this volume in tics could already be used for the analysis of transactions, since both tics and actual volumes show market activity. However, the use of real volumes offers a more precise analysis, especially if we examine the volume and break it down into groups of purchase and sale prices. Only the movements of the progressive volumes provide this “X-ray view”.

Indicators of Progressive Volume

Thanks to the growing computing capacity available on the market and accessible to the general public, everyone is able to perform professional volume analysis using specialised platforms.

  • Analysis of the volume and interaction of supply and demand.
  • Demand and supply continue to play a very important role in volume analysis.
  • Developing strong trading ideas.

Analysis of the volume of negotiation provides the most likely answers to the following questions:

  • Why did the price increase (decrease) and the volume increase (decrease)?
  • How much did the volume increase (decrease) while the price went up (decrease)?
  • Why did you increase the volume while the price didn’t move?
  • How has the delta changed (the difference between buying and selling)?
  • How did the price behave when there was an abnormal volume?
  • What happened after that abnormal volume happened?

Therefore, each trader can form his own opinion on the change that is taking place between supply and demand by analysing the correlations between volume and price. Therefore, it is able to understand in real-time the dynamics between buyers and sellers directly from the graph.

In this way, solid trading ideas are developed. If, for example, the price slowly increases to the level of resistance, as the volume drops, the force of purchases is exhausted. There is a demand deficit which creates a sales signal, as the current price is likely to be higher than the fair price.

On the contrary, if the price falls slowly to the support level with a decreasing volume, the sales pressure disappears, which means that there is a supply deficit and therefore a clear signal of purchase since the current price is probably lower than the right price. But it is also possible that the price will refuse to go up despite a large volume of purchases. This means that, if there is a large company that sells assets using limited sales orders, on this occasion we have before us a clear signal of sale.

This is where we come to the issue of market rationality. Proponents of this theory believe that the current price is always fair and that the market automatically takes into account all the factors that may influence the price. However, market prices are formed in people’s minds, and people make mistakes.

Therefore, when you study the charts of prices and volumes you will find that the price at the ends is far from always fair. Unusual volume spikes in the market are often accompanied by media activities. At such times, the current price is likely to deviate from fair value. For example, Bitcoin reached a peak of purchases in December 2017 when prices were quoted at $20,000, and in late June 2019 when prices hovered around $13,000.

Advantages of Volume Analysis

Volume analysis does not require consideration of key factors, expert forecasts, and other additional sources. All the necessary information: time, price, and volume, is already included. This is the great advantage of volume analysis: from it, we can draw conclusions about the forces of supply and demand while providing us with all the necessary information in an appropriate way for analysis. It is not important what are the reasons for the buyers and sellers are: if they come from an intersection of moving averages, a deficit in demand in the area of oversold, a tweet from Donald Trump, or an unexpected accident.

If a graphics reader correctly interprets the interaction of price and volume on time, it will acquire the ability to trade online with stronger traders and make mistakes less frequently. The major experts will have already carried out their fundamental analysis and conducted their negotiation in the market (which can be followed in their volume chart) which will reveal their true intentions. Let’s see how the following example shows using the price and volume chart.

Example:

We mentioned above the high point of the purchase of Bitcoin at the end of June 2019. To analyze the volume of trading during this period, we must look at the footprint of the Bitmex markets over a period of 1 day.

The peak of purchases on June 26, which, as we all remember, was accompanied by an avalanche of positive news in the major media, shows a particularly high buying activity when the level of $12,500 was reached. The question then is: if these green groups show real buying power, why did the price of Bitcoin fall so low over the next few days?

On July 10, the level of 12,500 was tested. In fact, there are green “buying groups” (traces of activation of loss limits), but the main body of the sail is made up of red groups, which illustrate the pressure of sellers.

After comparing these facts in the price and volume charts, it seems that the market is not interested in moving forward so then we should expect a downward movement. Traders could then benefit from a good entry point with the help of Smart DOM or Smart Tape data.

Conclusion

Analyzing graphs based on price, volume and the changing relationship between supply and demand is a good way to interpret market sentiment. Without volume in the graph, it is impossible to analyse supply and demand.

A price chart without volume is like a bike without wheels: you can’t move forward. And this is what we have made absolutely clear in this article: only with volume analysis is it possible to have long-term success in trading!