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Currency Futures Volume

Let’s have a look at the issue of volume and whether trading in currency futures can help. Now, as I’m sure most of you know, there are no volume indicators in spot currency trading, which can be a problem, particularly if like me you came into the market from a stock trading background. Those of you who have visited my trading and investing site, will know that I believe volume is one of the few reliable indicators of price change in the market. When used in conjunction with Japanese candlesticks, and a real understanding of how the market works,  volume spread analysis is an extremely simple and powerful trading system. Now with futures we can start to move a little closer to having an understanding of volume in one of two ways. Firstly using open interest, and secondly by using charts that display “volume at price” – a recent addition to the CME data set, which allows you to see the volume price relationship and how it compares between the day, the week and the month.

It is safe to say that between 80% and 85% of currency traders use technical analysis almost exclusively, with only a passing interest in long term fundamentals. However, despite this dependency on technical indicators of various types, there is one that has never transferred to the market, and that is volume.  Since the spot market is de-centralised there is no reporting of trading volumes which makes currency trading a little like driving at night with no lights on – you have some idea of where the road is, but lights would be great! Now futures can help, and increasing numbers of traders are now turning to the COT report as a way of getting a view on where the markets are moving by analysing whether the professional player are net long or short on a particular currency pair. I will shortly be publishing a site which will explain everything you need to know about the COT report ( Commitment of Traders) and how to interpret the results, based on Open Interest, which essentially looks at how the changes in the volume of open interest contracts can highlight extreme positions, which in turn can help to identify major turning points in the markets. A secondary trading tool is to analyse changes in open interest volume, and to relate this strength or weakness in a particular trend.

Now, as I mentioned in the introduction we are starting to see the major exchanges start to introduce innovative products and services, to try to help traders and investors gain a better insight into the markets. In a recent development the  Chicago Mercantile Exchange have introduced a range of volume price charts for currency futures, which provide a detailed  view on the market. All the charts compare two time frames so you can compare a day vs day, week vs day or month vs day. The volume is displayed graphically on either side of a vertical line with the high and low providing the boundaries of the chart, and this allows you to instantly assess market strength or weakness around key price points. The charts also display the data in both numerical form and as a percentage, and each price point displays the high, low, close, and cumulative volume at each price. So, how do we use this information? Well there are many of them, but here are just a few as possible suggestions :

The first and simplest way is to use the closing price indicator where we are simply comparing the closing price with the volume, in much the same way as with candlesticks and volume spread analysis. We are looking for the anomalies, in other words unusually high volume or unusually low volume.

  • High volume – if the closing price is at or near a point of high volume then this could suggest support or resistance – cross check with the candlestick charts
  • Low volume –  if the closing price is at or near a point of low volume then this could suggest a lack of conviction in the move – again cross check with the candlestick charts

A second way to use the charts is to look for daily, weekly or monthly, high/low indicators. Here we are looking for trends with higher highs for an uptrend, and lower lows for a down trend.

  • Higher high – the move has bullish momentum just as on the chart where we expect higher highs and higher lows for up trends
  • Lower low – the move has bearish momentum where we have lower lows which suggest a downwards trend
  • Higher high and lower low – this could be a turning point, representing indecision in the market

A third way to use the information is to identify support and resistance levels by comparing what is happening in the volume of the futures market with our spot currency charts. If we see several high volume periods at certain price points, but no corresponding increase in prices, then we could be reaching a resistance point – checking our charts will confirm or deny this view. Similarly a support area can be identified in the same way on low volume.

  • High volume – where the trading range of one high volume  period compared with another, this could be setting a new trend for support or resistance – check with the candlestick charts
  • Low volume – as above but with low volume compared daily/weekly or monthly.

Finally we can look at the data historically. This is self explanatory, but if we compare the historic volume with the real time volume this will give us a view on market sentiment and trends.

  • Real time volume – compare historic volume with real time volume to identify traders re-entering the market and also to confirm market trends.

I hope the above has given you some ideas of how the markets are starting to develop, and how we can use the volume in the futures market to give us some clues as to market direction. This was in fact how I started my trading career, by having two screens side by side, one with the futures market ( in my case the indices ) and the other with the cash market. Using real-time live prices I would then forecast moves in the cash market based on the assumption that the futures market would move first, followed by the cash market. Now clearly this information is useful to us, even if we do not plan to trade futures, but are simply looking for volume indicators in the spot market. Combine the above with the COT report and I think you have two powerful sets of information to help you both in currency futures trading and also trading currency in the spot markets.