Friday, October 4, 2013

Volume-Range Analysis

I spent this afternoon doing some chart analysis on the EURJPY. One of EURJPY's unique characteristics is its relatively consistent volatility throughout the Tokyo, London and NY sessions. This can make any fluctuations in volume and candle range more meaningful than other pairs. 

I combined the Volumes indicator with an Average True Range (1) indicator on the bottom of my chart. What we are looking for are significant drops in ATR accompanied with a simultaneous jump in volume. The Volumes indicator in MT4 measures tick volume, not trade volume. Since the spot forex market has no central exchange, there is no way to measure trade volume. However, we can use tick volume as a proxy.

Why are we looking for a simultaneous drop in ATR(1) and rise in tick volume? The big money typically moves the market. When the big money accumulates a position, it wants to avoid moving the market against it. When we see a drop in ATR(1) and a jump in tick volume, this is a good sign that the big money is entering the market, usually against the short-term trend. For example, if the big money wants to accumulate longs without moving price against it, it'll enter during a short-term bear trend. Volatility drops as the big money begins to absorb the short-term bears. Its presence is detected by the jump in tick volume. Once that liquidity is fully absorbed and short sellers are out of the market, we then begin to see significant bullish movement, with the big money sitting on longs. 

This was today's chart. I marked positions where we saw a significant drop in a candle's ATR, accompanied by a simultaneous rise in tick volume. As you can see, such events usually (but not always) precedes significant movement.  

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