Volume ~ The Fuel of Price

Surfing and Trading have a lot in common. In order for decent size, rideable waves to arrive at the shore, a swell must be in the outer seas, only then gives surfers a guarantee of finding good waves at the beach. Similarly in order for price to sustain a decent move worth riding, volume must be present. Without volume, price will still move but not consistently in a particular direction.

Noticed that I mentioned particular direction? That’s right Tick Volume in Forex does not give us a hint towards direction, it simply gives us data of either high or low trading volume. Direction will need to be determined by a different indicator or candle pattern.

The image above has our updated ZScoreSuite indicator based on Price which help us determine trend direction by the histogram positioned above or below zero. It also gives up momentum when the ZScore value reaches the 1.96 level.

If you look at the image we have 2 areas of momentum but only one of them was really followed by Price. What made one move price more than the other? Volume! That’s right! I added the Volume indicator that comes with the MT5 platform as reference.

We know we need a certain amount of Volume for price to move, but how much Volume is needed? On GBPJPY above it looks like the Volume indicator was around 250-270 but below on AUDUSD the Volume indicator is only at around 70-80. Is that a constant number but different on each currency pair? Yep, it can get quite confusing

Introducing the ZScore of Volume

We are very excited to have added this new feature to the ZScoreSuite available for the MT5 platform. How is it different from any other volume indicator? Well if you read my article on ZScoreTradingSystem you probably already have an idea of its functioning applied to Volume.

Basically the ZScore of Volume gives us a quantifiable measure to identify when Volume is higher than the average Volume for a certain period. The best of it all is that the value or level (1.96) remains standard to any currency pair, index, stock, commodity or any other tradable instrument

As you see in the image above, had you been trading GBPJPY and noticed the first spike in momentum, you would have avoided that entry since there was not enough Volume to support that movement. Luckily price remained stable after the false signal. By the time the second momentum spike came on, plenty of Volume came along with it giving you the green signal to enter that Long. A decision that certainly paid off a bunch of candles later 🙂

We recommend setting the ZScore of Volume at a period double that of the ZScore Classic. In the case above I have ZScore in Classic Mode at 200 while ZScore of Volume at 100.

It is important to recognize and or remember that an increase of Volume can push prices to either direction. In the example below we see first a spike up on the ZScore of Price but if you look close enough the ZScore of Volume was not above the level and thus the signal to go Long was false and we did not take it. However, right after we see a huge increased of Volume while at the same time the ZScore of Price returned below the zero level and thus we took that Short trade supported by both price & volume.

Volume can also be used to Exit trades. As the trade runs out of Volume the risk for price to reverse increases thus a good practice is to keep track of both Volume and ZScore of Price and make sure to not stay on that trade if either one crosses to the opposite side of the zero level. Most often than not Z of Volume will give the signal to exit sooner than that of Z of Price.

I hope you enjoy this article. If you are interested in renting our ZScoreSuite Indicator for MT5 please click here