Forex Trading Articles

How To Use Volume and Open Interest To Explode Your Profits at 1 Month or Less

Momentum Indicators

The benefit with the skier is taking them faster and further.

Volume and open interest have been momentum indexes – which is, instead of working out for you instantly determine the way of market, they have been intended to assist you to measure the strength or weakness of market movement. This will be the main reason we’ve developed our very own Strike Momentum Indicator to direct our trades. For that reason, they have been secondary signs of future market management. I wouldn’t ever advise using open or volume interest amounts as the only cause for entering a trade.

These are purely secondary signs or trade “filters”, and may just and consistently be properly used as a result. Facets such as volume are of good use to verify your market investigation, but if not form the exact basis foundation for this investigation. I’ve seen markets move through striking, elongated price changes with scarcely a blip of shift at volume or open interestrates. And I’ve also seen significant developments in volume and open interest which indicated definitely nothing – which is, that happened at a marketplace which has been stuck into a comparatively modest trading scope and also essentially moving fairly fast.

In summary, volume and open interest might be exceptionally unreliable market indexes, notably within shortterm trading. But they may nevertheless be used to ensure an current theory this you has in regards to the even long-term management of market. 1 specific situation by which they could be helpful is when market was doing a fashion up or down, for a long time. You’ve got doubts concerning if it is going to keep on its present leadership, or begin to neglect at current prices and inverse leadership. Such an event, a substantial drop in volume and open interest can function as an early warning sign that market has only about “run its course”. Like wise, in case volume and open interest remain relatively stable, and sometimes even grow, as the marketplace evolves and grabs its breath, then chances are better that industry will restart its current fad once it gets moving .

Volume and open interest have been always said together for an excellent reason. Whenever with these as market signs, they’re more reliable when both the signs come in agreement with one another. The Fundamental mixtures of volume and open interest would be the Following:

More dependable signs
– Volume AND open interest increasing favors higher prices or present tendency .
– Volume AND open interest decreasing favors lower prices or up coming trend change.

Less dependable signs
– Volume upward, however, open down interest, signs a shifting economy.
– Volume down, however, receptive interest upward, usually indicates market collecting momentum to proceed higher. It’s ‘s good to remember when this type of push up fails, then your marketplace is very likely to undo aggressively into the drawback since those newly opened interests become stopped outside or dive for cover.

Momentum Chart

Volume and open interest amounts have a tendency to diverge whenever market’s management is unclear, or if there is no overall or long-term management (that is, even once the marketplace is only a “trading range market”). Incidentally there’s nothing wrong with a trading exchange market, provided that you may accurately recognize the trading scope. I’ve seen traders earn a whole lot of money simply selling near the very top and buying near the base of a trading range that remains in position for all hours, and maybe a few weeks or days.

From that time, I’m going to discuss volume. When forex currency trading together with pairs that are significant, all these indexes differ considerably more than interest will. Let’s ‘s look at a few volume readings and how you can apply them at a genuine trading state of affairs. Consider the Aud/Usd chart below.

Starting with the side of this graph, note the way after the purchase price was flat-lined and volume relatively low, volume rises markedly the moment the economy begins a considerable proceed to higher prices. But note , three or four candles after, even though industry continues to induce more expensive, volume begins to gradually dropoff. This is really a prospective hint that buying interest is drying up at the high prices.

Then as price drops below the 10 EMA, also only before the 5 EMA crosses into the drawback of this 10 EMA, volume starts to grab. Therefore there’s still another sign that the marketplace is spent at higher prices and can likely rise lower. Finally, taking a look at the right hand side of this graph today, note the abrupt sharp rise in volume which has a tendency to support that the switch back into the upside down as the 5 EMA crosses back across the 10 EMA (and, awaiting the left, and you can observe that price has moved over the purchase price amount at which the preceding go on to raised prices begun ).

Ah, but let’s stay appearing somewhat farther (the graph below shows the conclusion of their last one, after which more activity moving forwards ).

Momentum

Okay, fine 15-minute flare upward, 5 EMA spans across the 10 EMA and cross above the 50 EMA, and all with rising volume. Buy that, right? Well, yes, I likely would. . .but it doesn’t work out. Both price and the lower EMAs almost immediately cross back to the downside of the 50 EMA, and as you can see moving to the middle of the chart, price falls back down even lower than before. So what did we miss? – Not necessarily anything. I just wanted to illustrate that indicators, even several indicators together, do not always accurately predict future market direction.

There’s no such thing as a sure thing in trading the markets (well, except buying sugar at the 3-cent level. . .but that’s another story). The one clue that the temporary move back up might fail is the fact that after that first big 15-minute candle up, there was no follow through as there was in the previous move up – price almost immediately turned back to the downside, and just 3 candles later price was back down near the recent lows and all the moving averages had turned back to the downside as well. Again, the lesson to be learned here is that no matter how good a trade might look in the beginning, it still may not work out as anticipated (that’s what stop-loss orders are for).

Hmm…I guess I should have gone over this in the beginning – following are basic definitions of volume and open interest:
Open Interest is a measure of how many total positions, short or long, are currently held in a market. Are there a lot of positions currently held, or relatively few? – i.e., how much overall current interest is thereby traders in trading this market?

Volume is the measure of total buying and selling activity in the market. Is there a lot of trading going on back and forth, or relatively little?

I do believe that volume is a very helpful indicator, although, as noted above, only a secondary one. One of the advantages of floor traders on the exchanges over those of us sitting behind our desks at home, is that floor traders can actually see the momentum in an increase in volume, can see the suddenly frenzied buying and selling taking place in a market that’s making a significant move (or conversely they can see that while price may be moving a bit, trading is lackadaisical, routine, lacks conviction). This fact has been recognized by nearly all the legendary traders you’ve read about or heard of – that there was an advantage inherent in being able to watch not merely price changes, but the actual level of intensity in trading. Well, floor traders are almost a thing of the past now – nearly everyone is just sitting behind a computer somewhere. Nonetheless, volume readings can provide some sense of the true nature of the action going on.

One cautionary note: It’s difficult to accurately assess volume in the forex markets, simply because there is so much trading in currencies that occurs in so many different markets worldwide. It’s not like, for example, trading wheat, which is overwhelmingly traded in the CBOT market in the U.S.. Some people even say you can’t use volume amounts in forex currency trading. I’d say they’re probably about half of the amount numbers for forex probably aren’t exactly accurate; nonetheless, I think they’re a good enough estimate of trading activity that they is helpfully utilized.

Uh, okay, one more cautionary note: There is often a dramatic increase in volume at market tops or bottoms. It’s basically the market blowing out or exhausting, its remaining interest in price at that level. Therefore, volume is a useful indicator to help detect market reversals, significant changes in direction, up or down. Just keep an eye out for that.

To sum up:
– Volume and open interest are secondary indicators that is utilized to confirm one’s market analysis based on other factors.
– Volume and open interest are most reliable when both are in agreement, i.e., both increasing or both decreasing.
There are a variety of volume indicators available for charting, but personally, I just use the basic “volume” one.

All right then – go trade, make lots of money, have fun. Me, I’ll try to do the same, and I’ll be back here later in the week with an update on the “Zero to a Million” forex journey account.

Best wishes always, in all things.

Jack Maverick

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