Volume is essential to traders. It has a considerable influence on price movements as people consider it to be an indicator of where the smart money is going and the level of commitment big traders are making.
Such an indicator is handy for us lesser mortals whose individual trades are unlikely to impact on prices, as it allows us to copy or piggyback on the big corporate traders.
Volume in the forex market, however, is a very different beast from volume in stocks and futures markets.
With the latter, the number of contracts and the size of the deals are tracked, so volumes can easily be measured, but that isn’t possible with forex volumes. The forex market is decentralised, and the only realistic way to assess volumes is to count tick movements.
If you bear in mind that the global forex daily turnover amounts to around $6.6 trillion, the impossibility of keeping track of individual transactions is apparent.
In fact, nobody knows or even cares very much about how many forex contracts are made. What matters is the number of ticks the market moves up or down within a defined time frame. This is known as the tick volume.
Tick volume measures the number of times the price ticks up or down in a time frame. There is a strong correlation between tick volume and actual traded volume; in fact, the correlation is around 90% or more.
If the tick volume is increasing, it is almost certain that the traded volume will be increasing similarly.
Thus, if we analyse tick volume, we will get a good insight into the levels of commitment to selling and buying the big players are making. But there is an important caveat. Relying entirely on tick volume and ignoring other contextual market indicators is usually a mistake. You should always view tick volume as just one indicator; a powerful one yes, but don’t ignore its limitations.
Tick volume and its role in reading the market
The big question that we need to answer is whether the big players are driving the price movement we are seeing. The three factors to consider are the price, the volume, and resistance.
- If the price is heading upwards or downwards without being backed by a high enough volume, it will encounter resistance and movement won’t be sustained.
- If a high volume backs the price, then smart money from the big players is likely to be involved, resistance will be overcome, and the price movement can be expected to continue.
Thus, tick volume is an excellent indicator for confirming a real trend in price movements.
When price movements are not backed by tick volume, then they are likely to stall. This is crucially important when prices are pushing extreme highs or lows. If high tick volumes do not support those prices, then this could be a warning that the trend is weakening and will potentially reverse.
Many brokers provide their own tick volume statistics, which mirror the number of forex trades passing directly through that specific brokerage. While they might be interesting, they are not a good indicator of what is happening in the broader world of corporate traders.
Instead, they provide insight into how their clients might be interpreting the markets. As such, there is a danger of positive feedback distorting the picture. They are not an accurate indicator of the real forex market as they do not show how the major institutional traders are influencing the market.
True forex volumes are not available; instead, we use the tick volume. The tick volume in forex does not show the actual volume.
However, it is highly correlated with it and is a good indicator of the sentiments of the large traders who directly influence prices. By understanding tick volume strengths and weaknesses and knowing how to be influenced by tick volumes and when to ignore them will make you a better trader.