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Analyzing Forex Market Volumes

Foreign Exchange Market Volumes

Volume is a leading market indicator that can help traders to recognize strong trends and reversals, but also to identify the current market phase and to think ahead of the current price action.

In general, analyzing market volumes can be helpful in:

  • Evaluating the strength of a price trend
  • Confirming the breakout of a key support/resistance level
  • Recognizing the market phases of accumulation/distribution
  • Indicating signs of potential price reversal
  • Optimizing the time to enter/exit the market

The Aggregate Forex Market Volumes

All organized exchanges report daily the aggregate number of traded financial assets (contracts, shares, etc.). On the contrary, the Foreign Exchange market is an OTC (Over-the-Exchange) decentralized market and that means measuring the aggregate volumes is a very difficult task. The Bank of International Settlements (BIS) offer some insight regarding Foreign Exchange volumes.

Here are some key points according to BIS Triennial Survey (2016):

  • The Foreign Exchange market daily volumes average over 5.0 trillion USD
  • Spot transactions reach 1.7 trillion USD per day (diminishing for the first time since 2001)
  • FX swaps transactions reach 2.4 trillion USD per day (Forex traders are showing an increasing interest for derivatives contracts)
  • Outright Forwards reach 0.7 trillion USD per day
  • Options and Similar products reach 0.25 trillion USD per day
  • The US dollar remains the dominant vehicle currency, being on one side of 88% of all Forex transactions (Euro 31%)
  • Five countries (UK, USA, Singapore, Hong Kong, and Japan) contribute 77% of all Foreign Exchange transactions

Source: http://www.bis.org/publ/rpfx16fx.pdf

Forex Market Sessions and Volume

The London Session is traditionally the most active Forex session and the New York session is the second most active. The London/New York session overlap offers the most volume-active Forex trading hours.

■ Volume peaks between 12.00 GMT and 16.00 GMT

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Algorithmic or Mechanical Trading

Algorithmic, Algo, Mechanical, Systematic, or Rule-Based trading, refers to a trading method where order execution is based exclusively on a pre-defined set of rules and instructions.Introduction to Algorithmic or Mechanical Trading

 

What is Algorithmic/Mechanical Trading?

Algorithmic, Algo, Mechanical, Systematic, or Rule-Based trading, refers to a trading method where order execution is based exclusively on a pre-defined set of rules and instructions.

 Mechanical-trading rules and instructions include variables such as price, time, and volume

 Mechanical-trading usually refers to a software code (automated-trading), but it can be also based on manual execution

 

Who Applies Algorithmic Strategies?

Several different market participants apply algorithmic strategies, such as investment firms, hedge funds, high-frequency trading firms, large individual traders, and small retail traders.

In the top of the chain, there are several large hedge funds and investment firms using state-of-the-art technology and hiring a wide team of programmers, mathematicians, and professional traders. They use proprietary systems, programmed to trade tiny inefficiencies between the dynamics of demand and supply. These strategies can focus on a single financial market, or on multiple asset classes. The asset classes involved include shares, ETFs, currencies, and government bonds.

Can Retail Traders Compete?

In the short-term, retail traders are unable to compete against institutional traders holding superior technology and unlimited resources. Retail traders can only develop and apply mechanical systems aiming to trade price swings lasting from a few hours to several days.

Read more: Algorithmic or Mechanical Trading

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