In the foreign exchange market, you need to understand the basics and market dynamics to succeed. In this case, one frequent statistic commonly comes into play is "tick volume."
So, what is tick volume in forex? It is the number of price changes, or "ticks," that occur in most MetaTrader platforms. While it may provide a close estimate of real trading volume, it is not always reliable and fails to capture the full picture of Forex pairings.
Traders who want to use tick volume efficiently in their strategies need to have a firm grasp on the constraints within which it operates. Therefore, we ought to share the basics with you right here.
What Is Tick Volume?
Tick volume is the measurement of price changes (or "ticks") that occur in a certain time frame (a minute, an hour, a day) in forex trading. It is usually used to measure market activity and mood by traders and analysts.
Suppose you are analyzing the EUR/USD in a one-hour time frame. You check the tick volume chart and see that in the first hour of trade, there have been 150 ticks.
During that hour, the euro and dollar exchange rate changed 150 times. A tick is created whenever there is a change in the ask or bid price.
Why Is Tick Volume Important In Forex?
Tick volume is a useful supplemental tool for traders to employ in their research. If a trader can implement this with other indicators and data, s/he can understand trading aspects in a better way.
The best thing about tick volume is that traders can know about the timeframe, like timing entrances and exits, and assume when the trading activity is likely to be high or low. As a result, it becomes easier to make decisions depending on the gathered knowledge.
For example, it helps a trader know from the data that high tick volumes during a price trend may reflect strong market sentiment. Therefore, s/he can verify the trend's strength, and plan accordingly.
On the other hand, low tick volumes in a trend may indicate that the trend is losing steam- which helps in risk mitigation.
Tick volume and price changes are closely monitored by traders, who search for discrepancies to predict reversals. Traders might notice breakthroughs in prices while understanding the trade might be more credible if it is accompanied by many ticks.
Day traders, who try to profit from minute price fluctuations throughout the day, frequently use tick volume to locate promising trading opportunities.
Drawbacks Of Tick Volume
Tick volume metrics might be helpful to an extent, but it has their own drawbacks and sometimes, they can be unreliable. Here are a few to start:
- No Standardization: You can never expect a centralized repository for volume statistics in forex because a single entity does not dominate this market. Your trading platform determines the tick volume you see. Therefore, you can’t assume that the tick volume will provide you with an all-encompassing look.
- Zero Information On Order Size: One of the major problems with tick volume is that it does not categorize the size of orders placed. Any order size can cause ticks, and large deals that significantly affect the market may not be reflected in tick volume.
- Not All Trades Generate Ticks: Likewise the previous problem, it can happen that large trades occur inside the bid-ask spread without adding any ticks to the tick volume. Therefore, tick volume may misrepresent trade activity.
- Lack Of Reliability During Low Liquidity: During times of low liquidity, the tick volume indicator may falsely register high levels. As a result, traders may get false alarms which might affect their decision making.
- Broker Dependency: Tick volume statistics from various brokers can vary widely because of the wide variety of liquidity providers they utilize. As a result, traders using various platforms may get varying tick volume values for the same currency pair. This makes the whole thing very inconsistent.
How To Use Tick Volume In Forex Trading?
Despite the drawbacks, you can use tick volume in your favor in certain cases. First of all, tick volume is essential for spotting possible market breakouts and reversals.
As we stated before, you can know whether the trading activity is intense or not by noticing the tick volume. An increase in tick volume during a breakout may indicate the strength of the new trend. A drop in tick volume during a breakthrough, on the other hand, may signal waning momentum.
You can understand a sudden change in market mood if you see a similar spike in tick volume during reversals. Therefore, traders can determine whether or not to enter or leave a transaction depending on this.
This method has the potential to greatly improve the reliability of trading decisions and lessen the likelihood of financial loss due to false market fluctuations.
What Do We Suggest?
Although tick volume has its own drawbacks and benefits, we suggest taking a calculative and strategic approach while considering a few factors.
First, you must remember that tick volume has its own restrictions. Therefore, the information is broker and trading platform-specific and does not reveal deal sizes.
We advise including tick volume in a larger trading plan to maximize its usefulness. Trading decisions based simply on tick volume may not produce ideal outcomes.
An expert tip is to use tick volume in combination with other indicators. Look at tick volume for confirmation if a technical signal indicates a trading opportunity, such as a moving average crossing or a trendline breakout.
How Is Tick Volume Calculated?
The "ticks" in a certain time period, whether one minute or one hour, are used to determine the tick volume. Price changes, or "ticks," add up throughout the selected time period to make up the tick volume.
What Is 500 Ticks In Forex?
"500 ticks" refers to a fictitious index used in foreign exchange trading. An average of 500 ticks represents the smallest conceivable price movement in the market. To better evaluate the amount of price changes, this index quantifies the variations and gives traders insights into the dynamics of the foreign currency market.
How Do You Trade A Tick Volume Indicator?
Tick volume indicators may be used to confirm trends, breakouts, and reversals, which can be considered while trading. Large tick volumes can confirm trade indications, while low tick volumes may affirm caution.
How Much Is 1 Tick In Trading?
The value of one tick in trading is not constant across all asset classes. The standard tick size for stocks is $0.01, however, smaller increments may sometimes be used. The smallest price movements are measured in "pips" in the foreign exchange market.
Learning about tick volume in forex can keep you away from certain bad decisions. But you must be aware of the fact that sometimes, these data can be highly unreliable. Therefore, the best bet is to use this alongside other indicators before you make a decision.