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Flojomojo

Thoughts on Forex Volume

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Hi everyone,

 

in this thread I would like to share with you my thoughts on how to determine Forex volume data. Since my research journey has brought me to the VSA method, determining volume is a vital component.

Elder states in Trading for a living that there are mainly three ways how to measure volume:

1) The actual number of shares, contracts, etc. traded.

2) The number of trades that took place.

3) Tick volume as the number of price changes during an interval.

Since Forex is an OTC market with all three methods it is impossible to determine the exact volume. Apparently eSignal delivers tick volume but I could not find out how they actually determine it.

 

Now this is what I came up with:

Interactive Brokers claims on their website to have 11 interbank partners participating in their order book. The advantage with IB is that they actually display the volume that is available at the best bid/ask.

Since the best bid/ask volume is available this gives a (hopefully significant) sample of the overall market. So what I did now is to determine which volume changes might be actual trades and which ones just improve the bid/ask spread. The logic of what counts as volume can be found in the attached picture.

 

Next week I will check how this approach compares to tick volume. I still got to program it, but I’m curious if there is a substantial difference…after all it’s a big difference if 5 or 20 million change hands, although both count as one tick.

 

Does anyone have an eSignal chart for me with its volume figures? I’d be interested in how it differs to my method!

 

What do you ppl think about this approach? Is the reasoning fairly complete? Did I miss out something important?

 

Have a nice week,

Flojomojo

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In spot FX you're still going to get "tick volume" or changes at the bid/ask, not actual traded volume, even if you're dealing with an ECN type broker.

 

That's the nature of the beast in the FOREX world. A good source to review all this is at http://www.kreslik.com. Review the posts and you'll find an in-depth analysis of this issue already done for your benefit.

 

-fs

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Hi forsearch,

 

thanks for your useful link! Thats quite some analysis Kreslik is doing there!

 

Yesterday I recorded the tickvolume parallel to the volume I monitored so far in the approach described in my earlier post. Every price change at the bid or ask was counted as one tick. I've attached the comparison graph for 15 minute intervals and the corresponding price movement during the period.

 

As you can be seen on the graph...the histograms are almost identical to the eye! A little calculation reveals:

 

1 minute interval: 88.4% correlation

5 minute interval: 95.8% correlation

15 minute interval: 97.4% correlation

 

...so unfortunately my previously described approach to volume is basically the same as tick volume! :\

 

Good trading,

Flojomojo

EUR-_vs_Tick-Volume.thumb.jpg.0f6b582360833d7ec7da97712d5425b7.jpg

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Due to the way it is generated, tick volume is useless as a proxy for true FX market volume. I think I've put stuff up about this here before (or possibly over on T2W). Will try and dig up a link or two as it's a lot of typing.

 

edit http://www.traderslaboratory.com/forums/130/the-lounge-3862-7.html#post38090

 

here you go - thats one anyway. I think the more detailed stuff was over on T2W

 

GJ

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...so unfortunately my previously described approach to volume is basically the same as tick volume! :\

 

Flo,

 

Looks like you've got the jist of it now. So-called "Tick volume" in FOREX is the same as bid and ask changes, as you just empirically proved to yourself now. It's not the same as actually traded volume, since there's no central exchange for spot FX.

 

Whether it matches the data for FX currency futures, which are traded on an exchange (CME) and have actual traded volume available is an exercise that you may wish to look into as well.

 

-fs

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I wonder if you FX experts consider it useful as a proxy to gauge relative volume?

 

I think it is clear it has no value at all determining absolute volume but can any conclusions be made by comparing the number of changes today between 9.30 & 10.30 with the number of changes yesterday between 9.30 & 10.30? Or for that matter comparing this 15 minutes with the last 15 minutes? Just wondering.

 

Also market profile seems eminently suitable for analysis of spot FX where essentially time (in the form of TPO's) spent at a level is used as a kind of proxy for volume. I have always wondered if anyone uses MP on currencies.

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I wonder if you FX experts consider it useful as a proxy to gauge relative volume?

 

Hi Blowfish,

I just found approx. the same discussion here: http://www.traderslaboratory.com/forums/34057-post1011.html

Sledge seems to use relative tick volume data. I just started my VSA journey, but what I have seen so far, relative volume gives an idea of whats going on in the background. The entire discussion is here: http://www.traderslaboratory.com/forums/34/vsa-volume-spread-analysis-part-ii-3428-102.html

Good trading,

Flojomojo

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I just found approx. the same discussion here:

Sledge seems to use relative tick volume data. I just started my VSA journey, but what I have seen so far, relative volume gives an idea of whats going on in the background.

 

As Mr GammaJammer say's; you're totally wasting your time, efforts & merely pissing into a headwind attempting to read something (volumes on spot) which doesn't exist.

 

If you insist on matching up a volume print with your price grid then go trade futures.

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tell you what, ring around a few of the Prime Broker, IB desks & major firms who operate in this environment & when you get thru to a dealer or senior bod ask for feedback on your (spot) Fx-volume strategy & how it might be best tweaked or improved upon.

 

I’d be sure & hold the ear piece away from your ear a little though, coz they’ll be laughing so loud & hard it’ll rattle your head.

 

That’s how ridiculous that scenario really is.

 

This thread should really carry a health warning. Either that, or just nuke it so it can't do any lasting harm.

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It's all total horse, but no-one is going to believe me despite my posts, so I give up.

 

GJ

 

Don't give up! Personally I am keen to hear what you (and the other FX pros) have to say on the matter, hence the questions.

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Don't give up! Personally I am keen to hear what you (and the other FX pros) have to say on the matter, hence the questions.

 

It doesn't hurt to ask, but it does hurt to ask if there is no willingness to listen to the answers. The answer here is pretty clear: volume analysis in forex is bunk.

 

Any correlation with positive trading results is more likely the result of some component of the volume equation correlating with price action - like momentum or moving averages or some other component of the equation. It couldn't have anything to do with volume. So if Walter is experiencing success, it isn't because his indicator is representing volume. It is because his indicator is representing some other aspect of price action that he is able to properly decipher.

 

To lead people to believe that volume indicators work in forex is misleading in the extreme. People who use volume indicators would do the forex community a better service by breaking the volume indicator into as many pieces as they can, and then correlate each of those pieces with price action. I submit that what they discover will be completely unrelated to true volume.

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In my personal experience so far, proxy forex volume data works ok... cheers Walter.

 

Walter, see my previous post. I have a problem with "proxy forex volume data." Why don't you guys think up another term? Something like, rainbow-average analysis or mean-stupified-assumption index? The use of the word "volume" is where this problem of interpretation is originating.

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Not giving up on TL (at least not quite yet), but am giving up on this thread as I've said, via the links that I posted, all that I feel I need to say. Tick volume doesn't even work as a relative measure imho (although that's not to say it wasn't a good idea in theory and worth a look). And as I feel my posts explain why I hold these views, and as no-one came back to say that they had read and understood them, OR came back to ask me for a bit of clarification, I just felt that this thread was one of those threads where people came to it already having convinced themselves of their view, and not prepared to let anything sway that.

 

I freely admit that I too am pretty fixed in my view on this stuff, but that is because it is my job to know this sort of fine detail about the market inside out, and it has been for some time. So if I didn't feel like I was talking from a position if fairly deep knowledge I think my boss would have hired the wrong guy to run the trading desk ;)

 

GJ

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Not giving up on TL (at least not quite yet)

 

It’s going to be a shrinking table then Mr GJ. My sister (Anna), Art & the others have drunk up, paid their bill & wandered off into the night.

 

I agree with Arty & Andre, this joint is aimed more at the equity & ftrs community + the coding & indicator crew, which is fine if that floats your boat.

 

Nice & friendly for sure, & I’m certain it’ll continue to attract a healthy following. But to be honest as far as the retail offering goes, it doesn’t have anything else out there to beat.

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I certainly read the links and they did raise a couple of questions :) tbh as I don't trade FX I just filed them away for now. Seems that it is simply more sensible to stick to an approach that does not rely on volume data with FX or as I think Jocelyn pointed out trade futures.

 

I do think Market Profile on forex might be interesting. Essentially that uses time as proxy for volume (at a level). It will go in my notebook as a potential area for investigation but is likely just to remain a curiosity.

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So far tick data can be perfectly used as proxy volume data for forex, dont forget that activity is volume... and the performance so far for me has prooved to be good... cheers Walter.

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dont forget that activity is volume...

 

No Walter - it isn't. It might work for you to trade this way but be assured - the statement you made here in reation to FX and tick volume is utterly false.

 

EUR/CHF trading on EBS right after the oil data was a perfect perfect perfect example of what I'm saying.

 

Price was 1.6323/4. It went 23 Given then 22/23 21/22 20/21 19/20 without a bean going through (my screen shows bid, offer, last given, last paid etc etc). Finally someone paid the 20 offer (for smalls, which was all that was there). So at that point you had a 20/21 market where last paid was 20 but last given was 23!!!!!!!!

 

In between those two actual trades you had had lots of price updates that would have registered on your tick volume, but that didn't equate to a single euro of business going through.

 

This kind of thing is why I get frustrated. I try again and again to explain how stuff works, and people just hear what they want to hear.

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Thanks for that insight gammajammer.

 

I'm wondering though, if price moved then there had to be trades going through to move it right? Maybe it didn't happen through EBS but someone else?

 

Or maybe it happened through EURUSD and USDCHF and reflected as just a price movement EURCHF?

 

Your thoughts?

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This kind of thing is why I get frustrated. I try again and again to explain how stuff works, and people just hear what they want to hear.

 

Thanks for the example, GJ. There is no possible way you could explain this any clearer.

 

These other guys need to start using a different term other than "volume." They're using a word that doesn't properly describe what they are measuring. It's like using a thermometer to measure weight.

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Thanks for that insight gammajammer.

 

I'm wondering though, if price moved then there had to be trades going through to move it right? Maybe it didn't happen through EBS but someone else?

 

Or maybe it happened through EURUSD and USDCHF and reflected as just a price movement EURCHF?

 

Your thoughts?

 

 

Part of the problem is that there is no way to determine how much size was placed in (or taken out) of the market to move price those ticks. On GJ's platform, absolutely nothing went through yet price moved. Yes, somewhere, size was put into the system, but because forex is not centralized, there is no way for anyone to tell how much size went through. It's possible a tiny amount went in during low liquidity to move those pips. It's also possible heavy volume was involved in both directions to move those few pips. The point is, you can't tell. No one can. Thus, any indicator that claims to measure volume is utterly incapable of telling the truth. It isn't volume that these indicators are measuring in forex. It's tick changes and nothing more. Equating tick change with volume can't be done in forex.

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Not necessarily - some of the price feeds these days are a bit of a house of cards, so you genuinely can have price updates with little or no accompanying volume. Yank on one thread and something else moves a little, causing in turn something else to move etc.

 

I'm not saying this happens all the time, merely that the fact that it happens at all, and that I don't have to wait any length of time to find examples exposes the assumptions people are making when using 'tick volume' as any sort of approximation for proper volume are just completely off beam.

 

And as for eurusd / usdchf yes that can indeed form part of why contributor firms update their eurchf prices, but again, that in itself doesn't mean anything at all in terms of eurchf volume per se. If anything, it adds further to my argument.

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