Question

Hi Anna – Hope you are doing good! I would love to use this opportunity to say you THANK YOU for writing all three books. Though, I have purchased all three but have not read all. I am reading your book “Forex for Beginners”. I like your way of doing the work especially VPA but I am confused to see the price behavior of EURJPY with high volume. Please assist me as there is a hammer candle with extreme volume in 1 hour time frame. I was expecting the price to move in different direction (Up). PFB

Answer

Hi – many thanks and this is a question I’m often is asked – whether volume price analysis is effective when trading the spot forex market, given there is no central exchange and that we have to rely on tick volume via a feed that is usually provided by our broker. My answer is always that tick volume is a good enough proxy for volume, which in reality is no more than market activity and even if the broker feed does not reflect the entire spot forex market it is a good enough representation of what is occurring. In addition some of the larger broker are now delivering a volume feed where a tick equals a trade. And so to your question which raises several interesting points.

The first of these is the context against which any price reversal is framed in terms of what has gone before, and this relates both to the timeframe and the extent of the move. Both of these will have an impact on the extent of any consolidation phase and/or associated stopping volume. This is much like the tanker analogy which takes several miles to come to a stop even when the engines have been switched off. As I have pointed out in my books it is very easy to consider one candle in isolation, such as the example here where we have a distinctive hammer candle with extreme volume. The EURJPY then consolidated, before rallying (as expected), but the associated volume on the rally was insufficient to take the market very far. This also reflects the level of buying on one candle, and again the extent of the consolidation phase and the associated stopping/buying volume will also be reflected directly in the extent of the reversal higher. In other words, everything is relative and there was certainly an opportunity to take a trade to the long side, although the volume price analysis was suggesting this rally was likely to be weak with the pair rebasing further before building a platform for any sustained rally, at a lower level which now seems to be the case. This was duly confirmed by a further sell off.

What is interesting to note from the price action at this point is that the stopping volume and associated absorption of selling pressure was declining, also suggesting a draining away of negative sentiment. In other words the market was falling as were the major spikes of stopping volume suggesting this diminution. The next issue, when considering spot forex and VPA, is the complexity of not only viewing euro selling in a single chart but also to view it through the prism of global demand. If the selling in the EURJPY is also evident across its’ cross pairs then clearly the selling is universal which confirms the picture on the single chart. This is a key issue and one which you will need to understand, particularly on the longer time frames, as it is very easy to see a currency being bought in one pair and yet sold in another, clearly signalling an inconsistency in market sentiment.

Finally, another piece of the puzzle is in applying multiple time frames, which will again confirm and validate any move using VPA in either a faster or slower time frame. This will then give you a complete picture, putting a single chart into a three dimensional context. I hope the above helps and once again many thanks for an interesting question – all best wishes and good trading –  Anna

By Anna Coulling