Hello, my distinguished colleagues. Today, I want to share my experience of trading with the hor...
Hello, my distinguished colleagues. Today, I want to share my experience of trading with the horizontal volume indicator.
This method can be universally applied, but it has different features for different markets that affect trading a particular instrument. Using a horizontal volume is an efficient tool that will help you make wise trading decisions in the financial markets.
First, I would like to dwell on some theoretical aspects. As a rule, an individual trader has limited financial resources and the amount of time he/she can spend on the market analysis to decide to buy or sell.
The only source of information about the market sentiment and the price changes is usually the price chart. Most traders do not use fundamental analysis in trading, thinking it to be of little use in making trading decisions.
However, the success of a particular trade depends on how the trader interprets the price chart analysis data. So, formalization, algorithm, and the ability to read the chart are extremely important for any trader.
Trading with technical analysis, traders usually use price chart patterns and indicators that mostly reflect the price movements. However, the trading volume indicates not the price, but the number of trades entered for an instrument. Assume that one order is put every minute, and the price goes up by $1.
If we look at the price chart in the 5-minute timeframe, we shall see that the price goes up by $5, which will be indicated by a bar, candlestick, or line.
However, the amount of an asset traded during this period, and so, the amount of money spent on the price movement will be unknown. It can be 5, 50, or 150 contracts bought and sold at a given price. Why are these data essential, and how can we use them in trading?
First of all, let us clarify the Trading Volume meaning. Trading volume is the amount of a trading asset sold and bought during a particular period. Time is a vital element of this indicator, and I will explain why.
Most traders trade in the derivatives market and only a part of the trade-in the stock market.
We see the price rates in the LiteFinance trading terminals when trading Forex or CFDs are derived from the derivatives market prices, whose contracts are closely related to the amount of money, liquidity, and placement period.
The price is determined when there is a buyer and seller who make a deal. If the market liquidity is low, the price will move in jerks.
If buyers and sellers can’t find each other, the transactions will be rare. If the cash amount is high, the price will run smoothly, and it will be easy to find a counter-party.
Its short-term nature determines Forex liquidity. We see the history of the price in the trading terminals. However, there are no longer support/resistances consisting of real money, which are reflected in three-month history.
Looking at the price in the terminal history, we see only the trace of a transaction once executed, its shadow, if you like.
However, if you consider the price level as a struggle between buyers and sellers, where the price can stop, there is no real money at this level in more than three months.
So, nobody will struggle for this level. The oil market has similar relevance of liquidity data over time. The gold market is a little different, which is determined by the investment nature of trading gold.
But in general, the gold market’s time structure can also be simplified, limiting the calculation of liquidity indicators to a three-month history. The first conclusion we can draw analyzing the support and resistance levels as the levels for a struggle between buyers and sellers.
Three months is the deadline for which these levels will make sense in the technical analysis. All quotes recorded longer ago won’t be relevant.
As my experience shows, you can consider three-month history levels to analyze the daily timeframe. To examine the four-hour timeframe, the levels of two-month history will be relevant. For the hourly timeframe, the history of one month will be enough.
For intraday trading, it will be enough to analyze the history of one-two week. Consider these periods not only for the historical data analysis but also to analyze the prospects of the position you opened in the market.
In this regard, analyzing weekly charts in the derivatives market is a waste of time and resources. However, in the stock market, where investors open long-term positions, the weekly quotes make sense.
I prefer to study the price movements in the stock market for six months, a maximum of a year. For me, the daily chart is enough.
We explored the timeframes relevant for the chart analysis and found out that we should analyze the history for no longer than three months. Now, we shall explore the horizontal volume and how it is displayed in the trading terminals.
Well, trading volume indicates the market activity and the liquidity traded at a particular level.
So, the higher is the volume, the more traders put their orders at the level, and the more critical it for our chart analysis. Vertical volumes indicate the number of transactions completed during a specific period.
Horizontal volumes sum up trade volume during a period and distribute it at a particular price level. (fig. 1)
Let's study the EURUSD market situation. The horizontal volume indicator at the bottom of the chart shows that market liquidity has significantly increased since February 24.
We can conclude that the uptrend is rather strong, as the higher is the liquidity, the stronger is the price move. Besides, we can see the horizontal volumes, displayed by the histogram on the right, are high at levels 1.1081, 1.1002, and 1.0839, which can serve as support and resistance levels.
Note that on March 12, 2020, the price rebounded up from level 1.1081, having just touched it. It means that a big trader decided to insure the long position from the price fall and bought a significant euro volume.
Therefore, if the big trader presumes that the EURUSD rate will continue rising, level 1.1080 should be excellent support. So, one can put a stop loss below the next level of volume accumulation, which is above 1.1000.
Why did I choose Jan 15 as a point for calculating the volume? I selected that date because the first two weeks of the new year feature low liquidity. The money comes into the market starting from the third week.
I should note, however, the choice of the starting point of the reference point is subjective. It doesn’t have rigid rules; everything depends on the trader’s personal preferences.
The trader, however, should understand why he/she has chosen a particular date. The reference point is usually the beginning of a calendar month, the beginning of a trend, or any other period that makes trading sense.
Now, let me explain how to use the horizontal volumes indicator in the hourly timeframe. (fig. 2). The starting point is the beginning of the uptrend, Feb 20. As the histogram shows, the maximum trading volume is around 1.1180.
Below, there is the support level of the longer timeframe, 1.1082, and 1.1002. For the EURUSD sell trades, these levels can serve as targets. A stop loss should be above 1.1180. A right stop loss level is around the high at 1.1216.
Therefore, if you combine the support and resistance levels indicated by the horizontal volumes with other technical analysis methods, you will have a more precise market situation.
Your analysis will base on not only the technical tools of the price chart analysis but also on the market liquidity. So, your trading performance will be higher.
In conclusion, I want to answer a reasonable question, where do the volumes come from if the Forex market does not have a centralized trading place.
There is one little trick here. As a rule, the most correct will be the so-called real trading volumes in futures contracts and stocks, but you have to pay for such volumes because real-time data are quite expensive.
However, instead of real volumes, you can use the so-called tick volume, which measures the number of price ticks over a specified period.
As my personal experience shows, there is a little difference between real and tick volumes. So, you can save up time and money.
You can download the free horizontal volumes indicator on the developer website. Install the horizontal volumes indicator for MT5 or MT4 in the LiteFinance trading terminal and use it.
The only limitation of this method is that the indicator will start calculating the volumes only from the moment it is installed. The sooner you install this indicator on your trading chart, the faster it will help you make money. I wish you good profits.
However, remember the money management rules, as no trading indicator or strategy guarantees a 100% chance of success! (Source)
