Dynamics of market volumes a trading strategy
- VFX Blog
There is a popular phrase that «the whale becomes satiated most quickly when it swims against plankton». For trading, this approach is also applicable, and before how to make money on binary options it is important to know which side you are on - whale or plankton. Becoming a «Forex whale» is not given to everyone, but it is quite possible to swim synchronously with it if you use volume trading.
The relationship between price movement and the change in the balance of power between buyers and sellers, which is clearly visible through the volume of open transactions, is one of the basic principles of Dow Theory. No matter how the supporters of technical and candlestick analysis in binary options strategy try to convince us of the opposite, saying that "the price contains everything", in fact, trading on any trading asset is more dependent on volumes.
In other words: amount of money in open or pending orders at specific price levels. If large players want to «move the market» in the right direction, first they increase the money supply of deferred positions.
What is market volume?
This is the total number of sell and buy contracts opened in a given time period of trading day or session for a financial asset (currency, stocks, futures, options, derivatives, and others). There are two types of calculated values:
- Tick - only number of transactions, the dynamics of their change;
- Exchange or “real” volume - in addition to total amount, the monetary values of transactions by opening price levels are visible.
Binary option trading on stock data is more predictable - you can see the real interest of participants in price zones and levels, but tick data can also bring stable profits.
- Current size: small, medium, large. We look at past values for 10-15 periods or more;
- Transaction data: who opened the position (buyer or seller) and who he is: market maker, hedger, speculator or small player?
- Inputs and outputs of «big» money;
- Change in the balance of power buyers / sellers;
- Confirmation of breakouts of significant levels and others.
Given the limitations of ticks, the question arises – will such trading be profitable in terms of volumes? Yes, it will:
- When volume (histogram bars) grows, then there is a high probability of continuation of the current trend or a breakout of the nearest strong price level. Tick instruments do not give an accurate forecast, additional confirmation from top binary signals is required, especially during a sideways movement (flat);
- If in a low-volatility market (the volume is approximately at the same level) there are several large differences in the histogram up/down, this is a signal of accumulation of open interest both real in the form of open positions "on the market" and deferred. We are waiting for a new trend.
Once again, draw the attention of binary traders that the tick volume does not provide information about the balance of buyers/sellers, and hence the direction of future movement. It is possible to evaluate only the general market activity as a basis for additional analysis.
Strategy using technical indicators
Trading asset, trading time can be any, working timeframe from M15 and above. Two instruments of the oscillator group are used:
This trading technique assumes that tick and real volumes are the same. Candlestick patterns analysis will confirm the dynamics of changes in activity.
Binary option patterns on tick volumes:
1. Volume is growing, volatility is low, and there are bullish candles - future price growth.
2. Volume is growing, volatility is low, bearish candles are available - future price declines.
3. Price is growing; volumes are falling before there was a situation of p.1: the long-term trend is possible.
4. Price is growing; volumes are growing before there was a situation of p.1: the short-term trend is possible.
5. Price falls, the volume falls before there was a situation of p.2: the long-term trend is possible.
6. Price is falling; volumes are growing before there was a situation of p.2: the short-term trend is possible.
MFI - market facilitation index
The MFI (Market Facilitation Index) is a convenient indicator by which the state of the current market trend is assessed. The measurement is carried out on the basis of comparing price and volume changes over a certain time period.
The high bars of the histogram indicate the low resistance of the players of the current trend; confirm the «intention» of the price to continue moving. If the volume starts to fall, this will first be trading binary signals sign of the beginning of a reversal and a change in the BUY/SELL balance, we also watch for the emergence of divergence with Volumes as the strongest signal.
In other words, an increase in MFI with a fall in activity means that the movement is supported mostly by speculators. When volume increases on a fall in MFI, it indicates the entry of "smart money" and the beginning of a reversal or breakout of the sideways range.
- Green (strong). Strong trend, both dynamics and volume are growing at the same time. Usually not used as an entry point - it only confirms the presence of a strong movement and to control open positions.
- Brown (falling). Profit-taking began, but so far the trade is going on without opening opposite positions. A decrease in the strength of the trend is confirmed by a tick indicator. Like the previous bar not used for entry, it is often seen at the high of the 1st Elliott wave.
- Blue (fake). Big players stop adding volume to maintain the trend - false price surges appear, squeezing out the small market «crowd» from the market. We stay out of the market and watch.
- Pink (sagging). The volume increases, but in fact the trend is almost over and consolidation begins, after which a reversal or continuation of the previous movement may begin.