Volume--- how to use it and WHY

[ProfLogic]

Quote from PlusMinus:

Sadly you are very wrong and there is academic proof to show this. And what I notice a lot on this thread is a complete lack of rigor applied to the claims. There are entire bodies of academic work that use rigorous statistical treatments of these subjects that result in very compelling observations about volume, price and yes Forex.

What I see here is people saying: "i looked at the charts, bla bla bla". Unless you ran studies on a large volume of data and used proper statistical methods then you are talking about anecdotal information.

Please provide a link to ANY material that states accurate and complete volume data is available for ANY FOREX charting.

FOREX data comes for a group of 6 interbank feeds. Some banks feed into and use one feed, others feed into and use multiple feeds but no single bank or grop of banks feed into or use ALL of these feeds. Even as these banks feed into and use these data streams they selectively do not list some currency transactions that take place inside their hollowed halls. This means, to the lay person, that depending on the FOREX environment you are trading inside, at best you simply never get all of the currency transactions you are making your decisions on trading any set of pairs or at best getting bank manipulated data that they wish those looking at the feed to see.

 

[PlusMinus]

Quote from ProfLogic:

Please provide a link to ANY material that states accurate and complete volume data is available for ANY FOREX charting.

FOREX data comes for a group of 6 interbank feeds. Some banks feed into and use one feed, others feed into and use multiple feeds but no single bank or grop of banks feed into or use ALL of these feeds. Even as these banks feed into and use these data streams they selectively do not list some currency transactions that take place inside their hollowed halls. This means, to the lay person, that depending on the FOREX environment you are trading inside, at best you simply never get all of the currency transactions you are making your decisions on trading any set of pairs or at best getting bank manipulated data that they wish those looking at the feed to see.

I should have been more clear. Yes I agree there is not single reliable source for FX volume, because it is an unregulated OTC spot market, as you've noted, and also as you've noted it's a multi-contributed market as well. The same case can be made for gold, interest rate deposits and FX forwards, none of which have audited clearing centers that can successfully account for a large enough % of the transactions so as to be said to be an authoritative figure.

What I'm objecting to was this exact statement of yours:

"It's impossible to get any kind of accurate or consistent solution from FOREX."

That is false, there is a large body of academic research that disproves this, and having worked in institutional finance (the quantitative and electronic trading wing) I know from experience. Furthermore while your description of how the FX markets work is partially correct, it's not complete. The rates are not solely set by 6 banks any longer. Hedge funds transact large orders, often far larger than what banks feed within small time frames. A full explanation would require more space than you've allotted and a lot more detail and nuance.

Also there's something else that hasn't come up in this thread, at least not to the point at which I stopped reading, and that is the fact that even equities are listed on a multitude of exchanges. IBM is not listed on one exchange, it's listed on many exchanges around the world. In some cases those shares are fungible, and in some cases they are not. To the person who was noting the fact that there is a feedback loop in the FX market when orders are placed, resulting in counterparties covering their positions and pushing up volume, there is the same potential in equities. The only difference is that it's easier to account for, although far outside the means and skill sets of probably the vast majority of people reading this thread.

 

[slacker]

Thanks for the posts PlusMinus....

How similar to Forex volume are the currency futures volume information? Can futures volume act as a proxy for Forex?

Richard Olsen and the other developers of Oanda have done a lot of research on the symmetry of opening and closing positions. They use this data to vary the spread on Oanda and seem to be very successful. Any suggestion of other proxy measures of Forex volume that are within the reach of a retail trader?

Thanks and Happy New Year!!!

 

[ProfLogic]

Quote from PlusMinus:

I should have been more clear. Yes I agree there is not single reliable source for FX volume, because it is an unregulated OTC spot market, as you've noted, and also as you've noted it's a multi-contributed market as well. The same case can be made for gold, interest rate deposits and FX forwards, none of which have audited clearing centers that can successfully account for a large enough % of the transactions so as to be said to be an authoritative figure.

What I'm objecting to was this exact statement of yours:

"It's impossible to get any kind of accurate or consistent solution from FOREX."

That is false, there is a large body of academic research that disproves this, and having worked in institutional finance (the quantitative and electronic trading wing) I know from experience. Furthermore while your description of how the FX markets work is partially correct, it's not complete. The rates are not solely set by 6 banks any longer. Hedge funds transact large orders, often far larger than what banks feed within small time frames. A full explanation would require more space than you've allotted and a lot more detail and nuance.

Also there's something else that hasn't come up in this thread, at least not to the point at which I stopped reading, and that is the fact that even equities are listed on a multitude of exchanges. IBM is not listed on one exchange, it's listed on many exchanges around the world. In some cases those shares are fungible, and in some cases they are not. To the person who was noting the fact that there is a feedback loop in the FX market when orders are placed, resulting in counterparties covering their positions and pushing up volume, there is the same potential in equities. The only difference is that it's easier to account for, although far outside the means and skill sets of probably the vast majority of people reading this thread.

The original statement, "Try making any accurate decision or try solving any problem when you only have part of the problem to create a solution from. It's impossible to get any kind of accurate or consistent solution from FOREX.", back on page 9, I think was straight forward and pretty clear for any problem solving scenario.

I understand institutional finance too and understand how the environment is put together and operates. I've studied it from a focused technical aspect for over 15 years and have had the pleasure of interacting with some of the largest bank traders in the world. Now I'm not saying that there aren't successfully FOREX traders or hedge funds working in these arenas because we both know there are. I've spent many hours with some damn smart hedge fund quants and bank traders tweaking their models but the brick wall they all hit is the limitation of consistent data. A lot of the larger traders success comes from their size alone. Their models are built for success based on their size. Those hedge funds you speak of aren't creating their own data stream either, they feed from and deposit into the same streams everyone else uses.

Yes equities are listed on a multitude of (electronic) exchanges but the data is brought together via GLOBEX and presented in a more reasonable and consistent format. Now don't get me wrong, GLOBEX is far from perfect but is still light years ahead of the accuracy and consistency of the accumulative currency data & transactions that take place daily in the scattered FOREX feeds.

 

[ProfLogic]

Quote from slacker:

Thanks for the posts PlusMinus....

How similar to Forex volume are the currency futures volume information? Can futures volume act as a proxy for Forex?

Richard Olsen and the other developers of Oanda have done a lot of research on the symmetry of opening and closing positions. They use this data to vary the spread on Oanda and seem to be very successful. Any suggestion of other proxy measures of Forex volume that are within the reach of a retail trader?

Thanks and Happy New Year!!!

If I may answer as well . . . I know a number of traders that use the currency futures as a guide to their longer term positions in their FOREX trades because of the ability to get accurate volume information. Some have even switched over entirely to trading the futures because of this consistency.

 

[gtor514]

I find the volume data of the futures market useful for the forex but only on a daily scale. The data is available from the CME so I believe is reputable. Attached is a plot that shows the continuous and combined futures volume for the EUR. I don't use this info exclusively to trade but I don't ignore it either.

You also have Open Interest (1 day delayed) as an additional input. Most fx traders are familiar with the COT data, this can be used in a similar manner with the exception of knowing small versus large specs but information provided daily. I follow the commentary of one or more notable forex trader who refer to this data regularly and include the OI in their analysis.