In today’s article I want to spend a little bit of time explaining how we can use volume to get a better understanding of what’s going on in the market.
Many traders dismiss volume as not being reliable and to some extent this belief is true.
The volume we see on our charts is not the true actual volume, it’s the tick volume from the brokers platform.
Tick volume is where 1 tick equals 1 trade, this means if you see a large volume spike in the market its telling you that a lot of traders either placed trades during the that time period or they closed trades.
The true amount of volume cannot be known in the forex market because of how many different exchanges there are all over the world in which trading takes place on, when people realize this they tend to shy away from understanding volume and the information it reveals, which is unfortunate because knowing what the volume readings mean can aid you greatly in your trading and understanding of the market.
The Link Between Volume And Banks
Knowing when lots and lots traders have placed trades can help us in understanding what the large institution’s in the market are currently doing.
For a bank or hedge fund to take some kind of action in the market whether it be place a trade or close a trade they need lots and lots of traders doing the opposite to what they want to do.
For example if HSBC wanted to buy 3 million Euros they need lots of other traders to be selling Euros, the sell trades of the traders selling must at least total 3 million otherwise HSBC will not be able place their entire buy trade into the market.
If we look at this image you’ll notice some of the candlesticks have incredibly high volume (I’ve marked these candles with an arrow)
The high volume means lots traders did something during the creation of this candle, knowing what they did and more importantly knowing what the institutions did during this time require us to understand how traders make decisions.
In one article on this site I talk about reactive traders, traders who will make snap decisions about placing buy or sell traders without any kind of strategy or method so to speak. It t