Ever wonder how they did it?

I’m talking about those big-time traders back in the early 1900’s… men like Jesse Livermore and Charles Dow?

They made millions of dollars when electric computers were still a figment of the imagination.

The only trading tool they had was the ticker tape machine. And their charts would be updated by hand at the end of the day, that’s if they used them at all!

Can you imagine what they’d be capable of with today’s data-crunching technology at their fingertips?

But do you think it could actually be the other way around…

Would it be the case they’d simply slide into the shadows of anonymity, distracted and confused by today’s fancy trading tools like so many others?

You see, even though their ways seem antiquated, I think they actually held an advantage over modern day traders…

They were forced to use only the purest elements of analysis in their trading decisions. The ticker tape reported prices and quantities (volume) traded – it came spooling out of a machine on a thin strip of paper – and I guess they had to look at the clock on the wall to keep track of the times. That was all they had to work with!

If you read about their methods you’ll find they relied heavily on the relationship between price and volume to make their calls. It’s how they’d get a feel for the flowing currents of the market. If the price of a stock was moving upwards AND bigger and bigger blocks of volume were hitting the market to buy, it told them the up-move had some real weight behind it. It was a good time to get involved.

But if the stock was moving upwards in price and the volume coming into the market was drying up, it told them the move was possibly on its last legs… a reversal could be on the horizon. Or worse – the price was being manipulated by dishonest market makers! Either way, they could use the negative vibes they were tuning into to keep themselves clear of bad trades.

So why does volume analysis get little attention these days?

Well, using volume effectively is a bit more subtle than a big green arrow flashing on the screen telling you it’s time to buy. You do need to give a bit of thought to the relationship between the movements in price and the volume behind them. And I suppose that means it’s a bit tricky to plug straight into a trading indicator or build a strict rule based system around.

And there’s also the issue of de-centralised forex markets not reporting actual quantities traded (there’s a way around that – I’ll show it to you in a minute).

But if you really want to get a feel for the underlying currents in the markets, if you want to understand where the market is likely to move next, I’m sure volume will become an invaluable tool for you.

Why you should use volume in your trading

Like I mentioned earlier, there are only three pure elements to a trade. When a buyer and a seller meet in the marketplace and carry out their transaction there are three pieces of ‘evidence’ left behind. There’s the price the trade took place at, the time at which the trade was made, and the quantity traded (that’s the volume).

So when you sit down to do your analysis – when you put your market-detective hat on – it’s a good idea to pay attention to all three clues.

Volume is what’s going to show you the intensity or urgency behind movements in price. Keep an eye on it and you can gauge the buying or selling pressure behind the move. It’s all about who’s being most aggressive, the buyers or the sellers. And that can help you see beneath the surface of price movement… It’ll help you jump into strong moves at an early stage and also help you dodge the weak moves.

But I thought Forex didn’t have volume?

Yes, because forex is a de-centralised market there is no definitive record of quantities traded but most data providers do offer ‘tick’ volume. It’s a record of the number of trades taking place rather than the actual quantity of currency changing hands.

So a one minute bar on a chart of EUR/USD might show a volume of 300… that means three hundred different transactions took place during that minute. It’s not perfect, one trade might have been three times larger than the next, but it’s good enough to give you an edge to your decision making.

In fact, there have been various studies concluding tick volume gives as much as a 90% correlation to actual volume. And remember, it’s all about the relationship between price and volume anyway. You’re watching how increasing or declining price is backed up by corresponding fluctuations in volume rather than studying volume alone.

So how do you go about using volume in your trading?

There’s a bit of an art to it. It will take a bit of study and contemplation before you become an expert. But this is a perfect pursuit if you do enjoy a bit of analytical thinking and puzzle solving!

I’ll give you the name of a good book to read in a minute. But first, here are some ideas to get you going…

3 simple ways you could use volume to pick high-probability trades

First, let’s have a quick look at how volume appears on a standard candlestick chart…


On this 5 minute chart of EURUSD you can see 3000 ticks (transactions) were marked underneath the 5 minute candlestick. That’s how tick volume is reported against each candle, it’s very simple.

So let’s have a look at three situations in which you might take advantage of price/volume analysis.

1) A potential reversal bar on high volume:

This almost certainly suggests a short-term end to the down-move. The long wick on the candlestick shows buyers have already moved the price against the sellers, and you can see the high volume confirming their presence. ACTION: Take profits on short trades. It’s also an entry point for long trades.

2) A breakout on increasing volume:

Here we see price breaking out above a resistance level with increasing volume. This shows traders are jumping onto the move and contributing to its building momentum. You can take confidence the breakout is genuine. ACTION: Enter a trade in the direction of the breakout.

3) A pullback on decreasing volume:


Here we see a potential reversal on high volume but the immediate pullback in price doesn’t confirm further buying. And the decreasing volume shows no more buyers are stepping in. This means the move is now most likely to continue to the downside. ACTION: Enter short trade or add to short position looking for price to continue lower.

With a bit of logical thinking you can give a whole new perspective to your market analysis.

And if you’re interested in reading more, here’s a classic. It’s Richard Wyckoff writing under his nom de plume “Rollo Tape”:

‘Studies in tape reading’ by Rollo Tape – free online version

Be Prepared: Market Moving Data Coming This Week (London Time):

Wednesday 10th September:
– no big reports

Thursday 11th September:
– no big reports

Friday 12th September:
13:30 USD Retail Sales

Monday 15th September:
– no big reports

Tuesday 16th September:
09:30 GBP CPI
10:00 EUR German ZEW Economic Sentiment
13:30 USD PPI

So it’s a bit quiet on the economic data front this coming week, but that doesn’t mean the markets can’t still pack a surprise or two!

See if you can keep on top of the movements with your volume analysis skills.