Why traders don’t use volume indicators (and why they should)

Before we look at volume and volume indicators, let’s consider what affects prices …

Lots of people want to buy something … the price goes up.

Lots of people want to sell it … the price goes down.

No one is buying or selling … the price stagnates.

So, one of the primary drivers of price moves (up or down) is the volume of trades going on.

Sure, volume can’t tell us which way a price will move – but it can give us a really good idea of WHEN prices will move.

There’s just no denying that volume is important.

So, why do so many traders fail to use a volume indicator in their calculations?

Quite simply because it’s difficult to quantify.

If you’re spread betting, then nothing is actually changing hands – so, in theory, there’s no volume. Therefore no volume indicator. But that doesn’t mean that the volume of traders buying and selling isn’t affecting the price behind the scenes.

And on spot FX markets, volume isn’t recorded as the trades aren’t conducted through just one exchange (unlike futures prices).

So, we’re left with a conundrum. We know that volume matters – so, how can we get a meaningful volume reading that will actually help our trading, when no volume measure exists?

One solution that many traders use is simple candlestick size.

A big candlestick (including wicks) suggests that there’s been a lot of activity in that time period.

A short candlestick suggests that things have been quiet.

It’s not a bad compromise – it’s quick and simple to apply – but it is a compromise.

The solution I want to show you here gives a very accurate picture of activity – and is just as clear and intuitive to read off your charts.

It’s a new kind of candlestick that can revolutionise your trading …

As we saw above, we’re used to candlesticks being red and green, or white and black, according to whether the price has gone up or down.

These new candlesticks use colour in a different way.

The colour tells us how much activity has gone on during the period of that candle. Every time the price ticks up or down (a tick is the smallest movement the price can make), then we know there are buyers and sellers at play. And it’s exactly this activity that our candlesticks are measuring.

If activity during that period is extremely high, then the candlestick is coloured red.

If activity during that period is extremely low, then the candlestick is coloured blue.

If the activity is average, then the candlestick is green.

And that’s it – a clear picture of volume on a candle-by-candle basis, at a glance.

As you can see in the image here, the length of the candlesticks doesn’t always relate the how much activity has been going on. The red candles show extremely high activity; the blue candles show extremely low activity; and the green candles show average activity.

If you’ve come across these candlesticks before, you’ll probably know them as ‘extreme candles’, and the beauty of them is that they act like flashing beacons to us – telling us where the action is (and isn’t) happening.

Extreme candles can warn us about ‘timebomb’ candles about to explode into action …

Here’s an example of an innocent-looking little candlestick, that might escape our attention on a normal chart …

However, because we can see that this candle has extremely high volume, combined with its tight trading range, for us it paints a clear picture of buyers and sellers battling it out – this is a good indicator that prices are about to explode out.

With the help of these extreme candles, we now know which candles really matter – which ones show traders actively battling it out, the bulls vs the bears. And which candles show that traders are just plain apathetic.

I’m very excited about using these new candlesticks, and next week I’m hoping to show you some excellent trade set-ups using them …

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