Why does Forex Volume Data Change Everything?

By DailyFx | June 17, 2014 AAA

DailyFX.com -

- FXCM, parent company of DailyFX, has released a new FX volume indicator

- The ability to see volume in real-time is a game-changer for technical studies

- DailyFX Technical Strategists will cover volume data, DailyFX hosts twice-daily updates

Download the release of FXCM Volume and Transactions figures via FXCMApps.com.

FXCM, parent company of DailyFX, has made it possible for users to see live FX volume figures on their currency charts. The new data promises to change the way we look at our trading charts. Why?

Put simply, the ability to study volume adds an extra dimension of insight into trading crowd psychology and allows us to see detail which was previously invisible to the trader.

Unlike in centrally-traded and cleared markets such as Equities and Futures, forex trading does not trade in any single exchange. That means that there is likewise no single place for volume data, and as such we have historically been unable to use important volume indicators on our FX charts. Why might we view FXCM data as a proxy for such figures?

FXCM Inc. (NYSE: FXCM) is a global online provider of foreign exchange (forex) trading and related services to retail and institutional customers world-wide. It reported retail customer volume worth $263 billion in May, 2014 and an average of $12.0 billion daily. And though this represents a tiny fraction of the $5.3 trillion in daily FX turnover reported by the Bank of International Settlements as of October, 2013, it captures a non-negligible share of Retail FX trader volume.

More Color on our Charts - Looking at FX Volume to Add Insight

Why does Forex Volume Data Change Everything?

Source: FXCM Trading Station Desktop, FXCM Real Volume and Transactions Indicator, Prepared by David Rodriguez.

Let’s look at the significance of this data by simple example. Why might it matter to see such real-time data? DailyFX Analysts have posted updates of major volume spikes at potentially significant market turning points, and indeed we feel this is one of the most effective ways to use this important technical indicator.

The past several times we’ve seen Euro volume spike above $5 billion in one day have coincided with important Euro turnarounds, and indeed the indicator helped confirm a recent EURUSD reversal following the post-ECB tumble.

Volume and Transaction Spikes Often Coincide with Important Market Turning Points

Why does Forex Volume Data Change Everything?

Source: FXCM Trading Station Desktop, FXCM Real Volume and Transactions Indicator, Prepared by David Rodriguez.

Why might this make sense? These key price turning points can and have sparked buying and selling as traders react to markets hitting key support/resistance levels. And though a sharp spike in volume hardly guarantees that price will reverse, it does suggest that traders find price has hit an important turning point. Why does looking at Transactions add further insight?

If Real Volume is very high while Transactions are relatively low, it suggests that larger traders are the most active participants in a big move. This matters because our client profitability data shows that those with larger account balances tend to be more successful at trading FX.

In plain terms: large Volume spikes can often represent what “Smart Money” is doing. If Transactions spike, it suggests that the smaller trading crowd is most active. And indeed, our proprietary Retail FX Sentiment data shows that “the herd” can often be on the wrong side of the market.

Watching Volume and Transactions data can prove an invaluable resource—particularly as these indicators are available on even 1-minute FX trading charts.

Spike in Real Volume versus Transactions Favors USDJPY Rallies Higher

Why does Forex Volume Data Change Everything?

Source: FXCM Trading Station Desktop, FXCM Real Volume and Transactions Indicator, Prepared by David Rodriguez.

And thus we see the true value of the indicator: getting real-time insight on the significance and importance of currency moves. The ability to watch it on a high-frequency chart may prove invaluable to the FX trader.

This is by no means an exhaustive look at using the Real Volume and Transactions data on our charts but is designed to show instances in which using the figures could have helped us in our trading decisions.

Volume and Transactions data add color to our charts—both literally and figuratively. Using it can become an indispensable tool in gauging market psychology and ultimately making trading decisions.

Download the beta release of FXCM Volume and Transactions figures via FXCMApps.com.

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