When it comes to centralized trading, such as equity trading, information on traded volumes is public and easily accessible. This is not the case with foreign exchange markets, which are decentralized. Trading data is not aggregated – there is no information on the number of trades and their monetary volume.

Are volume indicators meaningless in forex trading then? No, on the contrary, but they should be used with an understanding of the origin and limitations of the data from which they are drawn. We present a tentative categorization of different data sources:

Broker data

Some brokers publish data on the trading activity of their clients. This information has a higher credibility when the broker is big and realizes substantial volumes. Data from small brokers cannot be representative.

Paid data

If we consider the pyramid of the forex market, brokers will be one level above traders. Larger financial institutions (e.g., liquidity providers such as banks) are located around the top of the pyramid. They have much richer information about the behavior of different categories of market participants (interbank market, institutional investors, market makers). Some of these companies sell information on foreign exchange volumes.

Futures

Futures are exchange-traded instruments and therefore trading data is verified. Unlike the spot market, which is realized at current prices, futures contracts settle the buy/sale of a currency ahead of time at a pre-specified rate. Thus, if on a given period we see huge buying interest in euro futures, for example, we can conclude that this currency is well supported and may appreciate (more on the COT report in the sentiment trading section).

Tick volume

This is a volume indicator offered by most forex brokers. This volume is not exactly trading volume. It is calculated based on the intensity of changes in quotes over a given period. The more the ups and downs over the period, the higher values the indicator will print.

This information alone cannot determine whether buyers or sellers dominate. However, for example, a combination of rising prices combined with sharply rising tick volumes can signal growing buying interest. If we see an increase in prices that is not accompanied by an increase in tick volumes, we should question the strength of the upward movement.

Similarly, decreases in quotes accompanied by increasing tick volumes account for sellers’ dominance. However, if the decline is not supported by an increase in volume, it should be questioned.

Tick volume behavior is most indicative around key support and resistance levels. For example, a break of resistance at low volumes should be viewed with an appropriate amount of skepticism.

According to various studies, the correlation between tick volumes and actual ones is high, which comes to show that the two indicators are largely interchangeable.

It is hardly wise to build one’s strategy entirely on volume data, but it could be an additional argument in making successful investment decisions.

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