Volume And Trading, Not To Be Discounted

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Using Volume Trading Strategy to Win 77% of Trades

Looking for the best volume trading strategy? Your hunt for the Holy Grail is over. With a win-rate of 77%, this can be one of the best Forex trading strategy that you’ll ever find on the internet… and it’s totally FREE.

With more than 30 years of trading experience combined, our team at Trading Strategy Guides has put together this step-by-step trading guide so you can take advantage of analyzing the strength of a trend based on volume activity.

The Forex market, like any other market, needs volume to move from one price level to another.

The Forex market is the largest and the most liquid market in the world, with 6 trillion dollars worth of transactions performed on a daily basis. If you can master volume analysis, a lot of new trading opportunities can emerge.

When we have a lot of activity and volume in the market, as a consequence, it produces volatility and big moves in the market. That’s really what most traders need in order to make a profit trading the Forex market or any other market be it stocks, bonds or even cryptocurrencies.

While you can still make money even in tight range markets, most trading strategies need that extra volume and volatility to work.

Volume Indicator Forex

In the Forex market, we don’t have a centralized exchange of total volume because we’re trading over the counter. If we look at any trading platform like TradingView, they have a volume attached to their chart. But, since we don’t have a centralized exchange that volume is coming from the feed that TradingView uses. Each retail Forex broker will have their own aggregate trading volume.

We can see that the volume in the Forex market is segmented, which is the reason why we need to use our best volume indicator.

The Volume indicator Forex used to read a volume in the Forex market is the Chaikin Money Flow indicator (CMF).

The Chaikin Money Flow indicator was developed by trading guru Marc Chaikin, who was coached by the most successful institutional investors in the world.

The reason Chaikin Money Flow is the best volume and classical volume indicator is that it measures institutional accumulation-distribution.

Typically on a rally, the Chaikin volume indicator should be above the zero line. Conversely, on sell-offs, the Chaikin volume indicator should be below the zero line.

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Volume Trading Strategy

This volume trading strategy uses two very powerful techniques that you won’t see written anywhere else. These are trade secrets that we’ve only been taught to professional traders.

The Chaikin indicator will dramatically improve your timing and teach you how to trade defensively. Having a good defense when trading is absolutely critical to keep the profits that you’ve earned.

Before we go any further, we always recommend taking a piece of paper and a pen and take notes of the rules of this entry method. You can also read a million USD forex strategy

In this article, we’re going to look at the buy side.

The Importance of Buying Volume and Selling Volume

Volume trading requires you to pay careful attention to the forces of supply in demand.

Volume traders will look for instances of increased buying or selling orders. They also pay attention to current price trends and potential price movements.

Generally, increased trading volume will lean heavily towards buy orders. These positive volume trends will prompt traders to open a new position.

On the other hand, if the cash flow and trading volumes decrease– we see a “bearish divergence”, meaning that it will likely be an appropriate time to sell.

You also need to pay attention to the relative volume —regardless of the raw number of transactions occurring in a trading period. Ask yourself how is the prospective asset performing relative to what was expected?

By learning how to use the Chaikin money flow and other relevant indicators, you will easily be able to identify whether the buyer or the seller is currently “in control.”

With practice, volume trading strategies can yield wins for your portfolio 77% of the time!

Step #1: Chaikin Volume Indicator must shoot up in a straight line from below zero (minimum -0.15) to above the zero line (minimum +0.15).

When the Volume goes from negative to positive in a strong fashion way it has the potential to signal strong institutional buying power. That’s our base heavy lifting signal!

Basically, we let the market to reveal its intentions.

When big money steps into the market, they leave a mark as their orders are so big that it’s impossible to hide. When the volume indicator Forex goes straight from below zero to above the zero line and beyond, it shows accumulation by smart money.

We’re a firm believer that you get the maximum bang for your buck when you trade side by side with smart money. Chances are that institutions have more money and more resources at their disposal. Odds can be stacked against you, so if you want to change that, just follow the smart money.

There is one more condition that needs to be satisfied to confirm a trade entry.

Step #2: Wait for the Volume Indicator Forex to slowly pullback below the zero line. The price needs to remain above the previous swing low.

Once we spotted the elephant in the room, aka the institutional players, we start to look for the first sign of market weakness. Here is how to identify the right swing to boost your profit.

We’re going to let the Chaikin Money Flow indicator slowly drop below the zero line. The keyword here is “slowly”. We don’t want to see the volume dropping fast because this will invalidate the accumulation noted previously.

Second, as the volume decreases and drops below the zero, we want to make sure the price remains above the previous swing glow. This will confirm the smart money accumulation.

The Volume strategy satisfies all the required trading conditions, which means that we can move forward and outline what is the trigger condition for our entry strategy.

Step #3: Buy once the Chaikin Forex indicator breaks back above the zero line. Wait for the candle to close before pulling the trigger.

Now that we have observed real institutional money coming into the market, we wait for them to step back in and drive the market back up.

When the Chaikin indicator breaks back above zero, it signals an imminent rally as the smart money is trying to markup the price again.

We would need to wait for the candle close to confirm the Chaikin break above the zero line. Once everything aligns, we’re free to open our long position. Here is an example of a master candle setup.

*Note: The trigger candle needs to have the closing price in the upper 25%.

This brings us to the next important step. We need to establish the Chaikin trading strategy which is finding where to place our protective stop loss.

Step #4: Hide your protective Stop Loss under the previous pullback’s low

Using a stop loss is crucial if you want to have an idea of how much you’re about to lose on your trade. Never underestimate the power of placing a stop loss as it can be lifesaving.

Simply hide your protective stop loss under the previous pullback’s low. Never use a mental stop loss, and always commit an SL right at the moment you open your trades.

Trading with a tight stop loss can give you the opportunity to not just have a better risk to reward ratio, but also to trade a bigger lot size.

Last but not least, we also need to learn how to maximize your profits with the Chaikin trading strategy.

Step #5: Take profit when the Chaikin Volume drops below -0.15

Once the Chaikin volume drops back below -0.15, it indicates that the sellers are stepping in and we want to take profits. We don’t want to risk giving back some of the profits gained so we liquidate our position at the first sign of the smart money stepping in on the other side of the market.

We always can get back into the market later if the smart money buyers show up again.

**Note: The above was an example of a BUY trade using the best volume indicator. Use the same rules for a SELL trade – but in reverse. In the figure below, you can see an actual SELL trade example.

Conclusion – Best Volume Indicator

The Volume Trading Strategy will continue to work in the future because it’s based on how the markets move up and down. Any market moves from an accumulation (distribution) or base to a breakout and so forth. This is how the markets have been moving for over 100 years.

Smart money always seeks to mask their trading activities, but their footprints are still visible. We can read those marks by using the proper tools. Here is another strategy on how to apply technical analysis step by step.

Make sure you follow this step-by-step guide to properly read the Forex volume. The Chaikin indicator will add additional value to your trading because you now have a window into the volume activity the same way you have when you trade stocks.

Thank you for reading!

Please leave a comment below if you have any questions about the volume indicator Forex!

Also, please give this strategy a 5 star if you enjoyed it!

(139 votes, average: 4.24 out of 5)

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High-frequency trading explained: why has it decreased?

The opportunities and returns on offer from high-frequency trading has fizzled out over the past decade. We go through everything you need to know about high-frequency trading.

‘People no longer are responsible for what happens in the market, because computers make all the decisions,’ – Michael Lewis, author of Flash Boys.

More than half of all equities traded in the US is done not by humans but by super computers capable of placing millions of orders each day and gaining advantage through moving milliseconds before the competition. This high-frequency trading has seen market makers and the largest players use algorithms and data to make money from placing vast amounts of orders to earn wafer thin margins.

But these margins have become even slimmer and the opportunity has dwindled: revenue last year was around 86% lower than it was when high-frequency trading was at its peak less than a decade ago. With pressure continuing to grow consolidation has started to take hold of the sector as high-frequency traders look to fend off tougher conditions.

We have a look at what high-frequency trading is and why it has declined.

What is high-frequency trading?

It comes to down harnessing the power of technology to gain advantages whilst trading. High-frequency trading sees large organisations such as investment banks and hedge funds use automated trading platforms that, using algorithms, are able to track numerous financial markets and execute vast amounts of orders.

If programmed correctly, high-frequency trading offers an obvious advantage to those institutions that have access. The highly powerful computers can spot new trends across global financial markets and act automatically before the rest of the market has had a chance to even identify the trend, let alone trade it.

The generally accepted characteristics of high-frequency trading and the firms that do it are:

  1. Deals in extremely high number of deals
  2. Orders are rapidly cancelled
  3. Holds positions for very short periods of time
  4. Holds no positions at the end of each trading day
  5. Earns wafer thin margins per trade
  6. Use of data feeds and proximity services
  7. Proprietary trading (when a bank etc. invests for its own gain rather than on behalf of clients)

Why does high-frequency trading exist?

High-frequency trading allows large institutions to gain a small but notable advantage in return for providing vast amounts of liquidity into markets. The millions of orders that can be placed by high-frequency trading systems means those using them are lubricating the market and, in return, they are able to increase profits on their advantageous trades and obtain more favourable spreads.

The nature of high-frequency trading satisfies both sides. Institutions can gain an advantage but one that is based on volume. The returns per transaction are tiny and therefore a huge number of trades must be completed to truly benefit which, in turn, ensures enough liquidity is being pumped into the markets. Firms have two direct income streams: one from earning the spread for supplying liquidity and another through the discounted transaction fees that trading venues provide to make their markets more attractive to high-frequency traders.

High-frequency trading: spreads and liquidity

Spreads and liquidity go hand-in-hand. Markets with high activity levels offer smaller spreads while those with lower trading volumes tend to offer larger spreads: with the spread being the difference in price between the buy (offer) and sell (bid) prices quoted for an asset.

The foreign exchange market, for example, sees over $5 trillion of currency traded each and every day to hold the title as the most liquid market in the world and it is this staggering volume that creates small spreads that only offer material profit opportunities if they are traded in large volumes. It is this reason why many choose to use leverage in markets with high liquidity such as forex, so volumes are maximised in order to take more substantial positions that otherwise might not be worthwhile. For less liquid markets such as small-cap stocks the spreads on offer are typically much larger.

Is high-frequency trading ethical?

Giving large institutions an advantage over smaller organisations and retail investors raises obvious questions about the ethics and fairness of high-frequency trading, and rightly raises the argument that it doesn’t help promote a level playing field. As well as competing with one another retail investors have to compete with an algorithm that is far superior than human trading.

Some also argue that the liquidity provided by high-frequency traders – the service they provide in return for gaining the advantages – is not as effective as its supposed to be because the speed at which high-frequency trading operates can see money flow in and out of a market within a blink of an eye, preventing other investors from benefiting from it.

Benefits and drawbacks of high-frequency trading
Benefits Criticisms
Provides liquidity to markets Provides ‘ghost liquidity’ that only helps HFT traders
Makes smaller spreads worthwhile Can cause collateral damage to other investors
Offers advantageous positions Institutions gain unfair advantage over others
No broker needed/lower costs Can cause collateral damage to other investors
Helps lower volatility in markets Takes no account of fundamental analysis

How significant are high-frequency trading volumes?

The US has always been the main hub for high-frequency trading, which has accounted for at least half of all the volume within the US equity market every single year since 2008. Volumes peaked at 60% in 2009 but, as the financial crisis took its toll, the share of high-frequency trading began to decline before stalling at 50% for three consecutive years until 2020 when its share began to climb again.

Source: TABB Group, Deutsche Bank, ResearchGate

High-frequency trading has not been as dominant in Europe – although still very significant – and the US was much quicker to adopt it. High-frequency trading only properly started to emerge in Europe in 2006 when the method already accounted for around 25% of US equity volumes. There has been a strong correlation between high-frequency trading volumes on both side of the Atlantic: European volumes peaked a year after the US in 2020 and has since followed the same pattern.

Why has high-frequency trading revenue collapsed?

The revenue generated through high-frequency trading peaked in the same year as volumes but the decline post-2009 was far more aggressive. In eight years high-frequency traders in the US have seen revenue from the equity markets collapse from a peak of $7.2 billion to below $1 billion in 2020 for the first time since the financial crash, according to estimates from consultancy firm TABB Group.

Source: TABB Group, Deutsche Bank

There are numerous reasons why the rewards of this practice have dwindled over the last decade or so. In a nutshell: increased competition, higher costs and low volatility have all played their part. High-frequency trading firms have been squeezed from both a revenue and a cost perspective, and the effect of that is exacerbated considering millions of trades need to be completed daily for the practice to be worthwhile. Vikas Shah, an investment banker at Rosenblatt Securities, told the Financial Times earlier this year that high-frequency traders have two raw materials they need to effectively operate: volumes and volatility.

The speed at which high-frequency trading operates means every nanosecond counts. But algorithm trading comes down to a zero-sum game based on how fast current technology can go. Once everyone is at the same speed the advantages high-frequency trading offers disappears. Not only does this mean every slight update is essential for the already highly expensive equipment but that the value of the vital data needed for its algorithms to work has risen exponentially. This data has to be acquired from the trading venues which, noticing the sector’s surging income, they used to their advantage.

‘Co-location services’, as they are known, allows a company to rent space in the trading venue’s data centre or server to secure a direct link to the swathe of price movements and other data as it emerges. According to Deutsche Bank, the co-location fees charged by major exchanges ‘doubled or tripled’ between 2020 and 2020. Ironically, when volumes fall exchanges lean on other sources of revenue such as selling data, but the higher cost of data has been one of the reasons why high-frequency trading volumes have dropped.

The relentless appetite to gain even the slightest edge over the competition has even pushed companies to move their physical location closer to the data servers because, apparently, the fraction of time gained by not having to send the information as far through the Internet is that valuable. This has spurred on a new breed of infrastructure provider aiming to connect trading venues and high-frequency traders with ever-faster cabling. Regardless of what tact they are using, the cost of high-frequency trading has undoubtedly risen and made it a less attractive option.

High-frequency trading and dark pools

Considering the importance of data for high-frequency trading and the fact the cost of such data is rising the role of dark pools is significant. These are private exchanges where institutional investors trade large volumes with one another without having to disclose the details of the deal to the wider market. This also means the transactions conducted in dark pools bypasses the servers feeding the data used by the algorithms established by high-frequency traders.

Dark pools are controversial. On one hand there is an argument in favour for them as the biggest players can trade large volumes without upsetting or disturbing the wider financial markets. On the other is the argument that they provide a way for corporate giants to deal amongst themselves while leaving everyone else in the dark.

These private exchanges are nothing new. Dark pools have been around since the 1960s and although data from these exchanges is slim it is thought the volume being traded has grown while the level of high-frequency trading on public markets has fallen. This is because the ability to trade large volumes on dark pools without causing severe price movements in the market means high-frequency traders have less opportunity to conduct larger trades on public markets, which in turn has put more attention on lower-volume deals which high-frequency trading is not designed for. Previous ‘flash crashes’ or sharp price movements caused by high-frequency trading has only glistened the appeal of dark pools.

Consolidation of high-frequency traders

The growing pressure on high-frequency trading has led to consolidation within the sector as companies combine to fend off higher costs and tougher market conditions. While the majority of high-frequency traders are private there are some publicly-listed companies involved in the sector such as Citadel Group, Flow Traders and Virtu Financial.

Virtu listed in 2020 and last year bought peer KCG Holdings in a $1.4 billion deal that saw it account for about one in every five trades conducted on the US equity market, and has recently been reported to be eyeing Investment Technology Group.

Other recent deals in this space saw one of the largest high-frequency traders, DRW Holdings, buy RGM Advisers last year and two further rivals merged after Hudson River Trading acquired Sun Trading after the latter was put up for sale in 2020 as margins came under pressure and its competitive edge in terms of speed was lost.

High-frequency trading regulation to continue evolving

‘Reg NMS was intended to create equality of opportunity in the US stock market. Instead it institutionalised a more pernicious inequality. A small class of insiders with the resources to create speed were now allowed to preview the market and trade on what they had seen,’ – Lewis.

The most substantial piece of regulation considered to have spurred on high-frequency trading from 2005 onwards was the introduction of the Regulation National Market System (Reg NMS) in the US. This regulation is what gave traders the insight into the strategies of other investors in the hope that, in times of crisis or during downturns, trading would continue rather than result in non-communicative brokers avoiding taking sell orders as they had done in the 1987 crash.

The International Financial Law Review highlights one rather notable aspect of Reg NMS that meant all orders that were placed had to be executed at the best price regardless of what exchange it is on, thus allowing high-frequency traders to spot trends in one exchange before rushing to capitalise by placing orders on another exchange before the effect has had a chance to ripple through. While it was meant to provide a more transparent and level playing field between the largest players in the financial market, everyone else was put at a disadvantage.

Things have been tightened since, with MIFID II in Europe and FINRA in the US both including rules on algorithm trading. The London School of Economics and Political Science states a major problem with regulating high-frequency trading is defining exactly what it is. While there are generally accepted characteristics there is no universally accepted definition.

Still, MIFID II implemented new rules requiring high-frequency traders to gain authorisation from market authorities and required better record-keeping as part of wider attempts to stamp out any abuse. However, there is widespread acceptance that there is much further to go in regulating the sector.

Volume And Trading, Not To Be Discounted

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Can we trade Volume Delta on Forex?

In a nutshell, volume delta is a method which pays attention to trading volumes and their changes on the price scale. It supposes that future price movements can be explained (and forecasted) by volume distribution in past. The name says that volume should be analysed in splitted into ask and bid volumes, and difference between them produces the delta.

You may find many sites out there which provide various tools for trading with volume delta charts. But one important thing about volumes is that real volumes – volumes measured in contracts – are available only for markets other than Forex.

Most traders assumes that tick volumes are not applicable for trading. Is this indeed so? I don’t think the answer is exactly “yes” or “no”.

It’s obvious that tick volumes are highly correlated with real volumes. On the one hand, it’s true that a big real volume may move price significantly in a tick, and it will be counted as a single tick, which looks unreliable. On the other hand, the Forex market is the largest market in the world, and according to the Law of large numbers, average price change in a tick should tend to a mean value, at least during a specific period of time when trading conditions are similar (such as European session, for example). In other words, any unusual concentration of real volume will in effect produce conforming number of price fluctuations which will generate unusual tick volume as well.

That being said, we can deduce that tick volume analysis may help in Forex trading. So the question is in proper implementation of a suitable tool. And here it is – VolumeDelta indicator.

It calculates tick volumes for buys and sells separately, and their delta, on every bar. Also it displays a distribution of volumes by price clusters (cells) within a specified bar. Cumulative delta, as a moving average of volume deltas for specified number of bars, is shown as well.

First, bars where price movement contradicts volume delta direction may foreshow a reversal.

There are even more signals based on cumulative delta. For example, the moments, when cumulative delta crosses zero line, can be treated as signals to buy (if crossed up) or to sell (if crossed down). When cumulative delta reaches previous high or low, one can trade in the opposite direction – buy from a minimum and sell from a maximum.

The best timeframes to use while trading by volume delta are M5-M15.

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