February 22, 2021 | AtoZ Markets – Unlike stocks and futures traders, retail forex traders have historically not been able to depend on volume data as an indicator in knowing when to enter and exit trades. And this is unfortunate because volume data can become more predictive of future price movements compared to pure price-based technical analysis. Still, there might be some ways to get a better picture of where the buying and selling are taking place beyond what traders already know.
DOM or Depth of Market
Some retail forex brokers offer this feature, but ECN brokers mostly do. The feature shows the pending orders to buy and sell an asset and at what price. Typically, it is a ladder-shaped graphic, with the equities shown against every price above and below the current market price.
More versions of this also include a market profile overlay that visualizes the quantity that has already been purchased or sold at a price so far during the trading day or session.
Also, it is important to remember that there is no marketplace in spot forex. But the data presented within a Depth of Market ladder would logically be specific to that broker. After that, the larger the volume or orders usually processed by the forex broker, the more efficient their Depth of Market data would be. This is the reason many traders relying on this data in their trading prefer to trade on major futures exchanges like where the forex futures are traded in massive quantities through a centralized exchange. It might not be as liquid as spot forex, but reliable volume data exists there.
Furthermore, more forex brokers are now offering real volume indicators within their technical charting software. Though it is not as good as the Depth of Market data, it can still be useful, which is the next best thing.
When the broker splits the volume given into buying and selling, traders can see every individual time period, not just the quantity of the buying and selling but also if more was bought or sold.
For instance, when the price goes up and reaches a level where traders think it will turn, they see that the selling volume is much heavier than the buying volume, giving higher-probability short trade entry.
Many retail forex brokers still do not have either Depth of Market or Real Volume data. Luckily, there is still a substitute for these data, but it needs to be approached cautiously.
In most charting platforms, there is a range of usual volume-style indicators available, like the on-balance volume indicator. All of them are essentially variations on tick volume. In MetaTrader 4, it is easy to see several excellent tick volume indicators for download that will color the candles on screen depending on if they have relatively higher or lower tick volumes.
Tick volume is the number of price movements made by the tick chart in the period covered by the candle. Although it is not accurate and does not really reflect real volume, a massive tick volume at expected support or resistance level can provide a clue about the future direction of the price.