Which volume indicator to use ?

Question

Hi Anna 

I purchased your book ‘Forex For Beginners’ which I thought was really 
useful. 

I am now working my way through ‘A Complete Guide to Volume Price Analysis’, 
only up to Page 46 as yet – but I am still really impressed. 

At the moment I am using a demo account on MT5. The only thing I am 
confused about at the moment is which Volume to use. You mention the Tick 
Volume, so I take it to be this – on my screen it is all in one colour 
(green). There is another Volume indicator as well though, which shows red 
or green line for volume. Should this be taken into account or not? 

Thank you in advance for your time,

Answer

Hi – many thanks for your email and also for your very kind comments which are much appreciated, and I’m just to delighted that you are finding the books useful and enjoyable.

With regard to the volume to use, the platform I am most familiar with is MT4 rather than MT5,  and here the indicator I use is called Volumes. In the standard format it paints each volume bar either red or green which can be confusing, as this has nothing to do with whether the volume represents buying or selling, but simply the relationship between the bars themselves. So for example, if the current bar is higher than the previous bar it paints is green, and if it lower then the previous bar it paints it red, which can be confusing. What I find works well is to change the default color so that all volume bars are the same, then all we are comparing is the various changes in volume and not confused with the different colors. I’m not sure on MT5 if the indicator is the same, but suspect it is, although there may be other volume indicators as MT5 covers broader markets with MetaQuotes now merging the two platforms closer together following the release of build 600.

The choice of volume indicators is a personal one, but as always the key point is to always compare like with like – apples with apples. So as long as you are using the same volume indicator for your analysis, either is fine. As I’m sure you know in the forex market there is no central exchange and the volumes indicator is based on tick activity in terms of price changes. In other words tick activity as a proxy for volume. Some forex brokers are now starting to introduce volume indicators to represent ‘real’ volumes based on their customers trading activity. However, given that the central banks are the market makers in FX, I would suggest this is of little value, and the Volumes indicator is therefore far more representative of what is really happening in terms of order flow, than retail traders. Indeed one could argue that retail traders might be a good ‘inverse’ indicator of which way to trade!

When I first started trading using volume, I spent several weeks testing, checking and then cross referencing all the various volume data feeds, trying to reconcile one with another. After a time, you soon appreciate that there is always a difference from one data vendor to another, or from one broker feed to another. The data is simply handled in different ways through the different feeds. What is important as I said above is that you use the same one, and compare like with like, otherwise you will drive yourself mad! It’s human nature – we all do it in a search for precision, but volume price analysis is an art rather than a science, and we have to accept that we are in an imperfect world!

Hope the above helps and many thanks once again and wishing you every success in your trading,- kind regards – Anna

By Anna Coulling

About Anna 1027 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

3 Comments on Which volume indicator to use ?

  1. Thanks for clearing this up. I was also wondering about the red and green lines! Btw. love your book, “A Complete Guide to Volume Price Analysis.”

    • Hi – many thanks for dropping by and there is no need to apologise at all, as your question is a good one, and indeed is one that many traders themselves will struggle to answer. The best way I can answer this is to explain what a tick chart it, and in essence it is one where time has been removed. If you think of a tick as an order, then when 100 orders have been placed in the market, then on a 100 tick chart the candle or bar would form as the 100th order is placed. The next tick bar would start to form on the 101’st order and close when 200 orders had been place. The key point is that time has been removed from the creation of the candle or bar. If the market is very fast moving, then 100 orders may be placed very quickly with the candle forming equally fast. Likewise if the market is slow or waiting for news, then each 100 tick candle or bar will take longer. This is the essence of a tick chart – it displays market momentum as the market speeds up and slows down, something you never see on a time based chart which closes at the prescribed time – i.e. 5 minutes on a 5 minute chart irrespective of market activity. On a time based chart you never see market momentum, on a tick chart you do. Not all platforms offer tick charts, but those such as NinjaTrader and Tradestation do, but MT4 does not. And moving to tick volume, this is what is displayed as a ‘proxy’ for real volume on the MT4 platform. As I’m sure you know there is no central exchange in the forex world, and so we use tick volume as a proxy for ‘real’ volume which is what you will see on the MT4 platform. The indicator you mention takes the standard tick volume indicator which is provided free with the MT4 platform and colours the volume bars to match the price action, making it quick and easy to analyse the volume price relationship. In addition it also describes whether this is high medium or low with a dotted line based on the daily volumes. I hope the above helps to answer your question and many thanks once again and wishing you every success in your own trading – kind regards Anna

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