EUR/USD: Lesson on reading tick volume & types of acceleration

Oct 17, 2018

What if you could add a ‘non-lagging’ indicator that would allow you to make better-informed decisions as a trader? That’s where tick volume, which measures the number of times the price ticks up and down, comes into play.

Did you know that tick volume activity and actual traded volume in spot forex exhibit a relationship that is extremely high? All it takes is to find a broker such as Global Prime Forex with sufficient depth of liquidity and learn how to properly interpret these volume patterns that occur over and over.

First, let’s briefly touch on why is volume such a powerful piece of information. The answer lies in the influence it has to move prices and similarly because it communicates the involvements of the big or smart money. Volume is the fuel to cause new cycles and tells us the degree of commitment that it exists to endorse a certain buy or sell-side campaign.

By understanding the bias of big players, we can piggyback their market bias. Let’s now back up with empirical evidence why tick volume matters.

In a landmark research paper published back in 2011 by Caspar Marney, veteran forex trader, who served tenures at banks such as UBS or HSBC, debunked the myth of the limited usefulness of tick volume in spot forex. Caspar, after a thorough study, concluded the existence of striking high levels of accuracy between tick activity and actual traded volume, which vindicates the importance of tick data and hence the relevance of this tutorial.

I once read a great analogy for volumes, which I can’t credit to one particular individual as it was many years ago and I completely lost track. He would compare volume to the accelerator of a car, price movement to the actual car motion, while a universal level of resistance/support would be a ‘hill’.

If the car is expected to keep going up a steep hill, do you think gently pressing the gas pedal would do the job? The forward motion of the car going up the hill can’t possibly be long-lasting unless there is more power (gas) applied, correct? What if you were to press the accelerator to its maximum capacity yet the car motion is still stagnant going up the hill? That would be another clue, right? Do you start to see how the study of volume can be of real value to tells us a story about the intentions of market participants?

So, how can we tell if a price movement has the characteristic of being smart money-driven? To accomplish our objective, we will stick to our 3 elements, that is, the car (price), the gas (volume) and the hill* (key level). How price heads into major areas of interest will be absolutely key to make a well-informed call about the environment as traders we face.

Volume Sequence: Type Of Volume Acceleration

Depending on the type of trader you are, this is all you may need to get your entry confirmation. Other traders will need some extra info before pulling the trigger, and that’s fine too. It’s all about styles. I will be exploring both scenarios, that is, the two most basic yet most fundamental volume sequence to constantly be monitoring, while I will also provide different individual candle formations that add an extra input of potential confirmation.

Let’s dive into it. The first pattern to be aware of is what I personally refer to as false acceleration, even if it’s more commonly known as exhaustion sequence. If you observe price heading into a key decision point on lower or decreasing tick volume, we are likely to find ourselves in a context where a rejection of that level is likely. Remember, the car is trying to go up a hill with little gas being applied. It doesn’t bode well unless gas (volume) increases.

This type of acceleration in price without the backing of volume tends to be a false picture of the market intentions, and certainly not one that carries the interest of the smart money. The low tick volume is caused by the professional money staying away from participating in the move. The absence of this big money riding the move results on thinner market liquidity, which facilitates a larger price extension even of low volumes. Unless the ‘smart money’ takes part in the move, the hill will get too steep for the car to keep moving forward.

Opposite to the pattern above described, let’s now look at a price movement that does carry the participation of big players, and therefore a continuation of the directional bias should be expected. I call it smart acceleration. If the price moves towards a decision point or the level is broken amid higher or increasing tick volume, more often than not, it communicates that the bias has the backing of the institutional money. When this happens, a continuation of the developing trend is expected. Find an illustration of this pattern below.