I have been studying your VPA methods extensively for the past several months. I must say it is very eye opening.
I re-read your book 3 times and every time I pick up something new.
I am trying to put in the 6 months of chart watching that you did previously, and I saw something strange with the NZDUSD this morning. I would like to have your thoughts on it if I may.
- At around 23:00 GMT Feb 23, 2015 NZDUSD Spot charts showed huge volumes spikes on my MT4 (Hotforex broker) as well as my FXCM charts. Price didn’t change. Please see attached images.
- My Interactive Brokers NZD Globex futures did not show these volume spikes, so there was a lot of transactions for NZD cash at that point in time.
- No NZD related news scheduled until 2 hours later at around 01:00 GMT.
The golden question is, and I hope you can help me answer it, was this volume buying or selling? And in this case what are the thoughts going through your head right now?
Your help is greatly appreciated, I hope to become as good a trader as you someday.
Hi Jon – thank you so much for your email and for your kind comments which are much appreciated.
The question you ask is an interesting one and really goes to the heart of the VPA methodology which is based on two simple principles, namely the validation of price by volume or an anomalous relationship. In this example it was the latter with the surge in volume on the 15 min candle not reflected with a consequent move in the price. At this point you would not be 100% certain that this was a precursor of weakness, ie selling. However, on balance this is what you would be expected given two things.
First, this pair had been rising prior to this volume spike, and second the pair is in a congestion phase and failing to breach the ceiling of resistance above in the 0.7530 region. These two factors would suggest that the volume was therefore selling, as if this had been buying then we would have expected to see the pair jump and break through to the upside. It did not and the compression price action suggests selling into a weak market. This was duly confirmed later in the session with the NZD/USD selling off on some tier 2 data, namely inflation expectation which came in below the ‘magic’ 2%.
The next question then leads on in your email is why this occurred sometime in advance of the news release itself and the answer here is insider positioning to take advantage. What is clear from the volume spike is that those on the inside may had some advance warning of the impending release and its content and sold accordingly. One reason it occurred in the spot market is, it is much easier to move in and out of positions quickly in this market.
Finally, just to round off having taken some easy profits it was then time to reverse the market back again, once again reflected in the volume price relationship.
Thanks for a great question, and Happy Trading!