Volume Analysis Basics

Grading two identical breakouts

Say a pair has been ranging between 1.3200 and 1.3300 for two weeks on an average of roughly 3,000 ticks per hourly candle. It breaks above 1.3300 on a candle showing 11,000 ticks. That is nearly four times normal participation at a level everyone could see, which is meaningful evidence that the break was acted on rather than drifted through.

Compare that with the same break on a candle showing 2,400 ticks, below average, during the Asian session. The price is identical. The evidence is not. That second break is a much better candidate for a false break, and if you take it, the sensible response is a smaller position rather than the same size with more hope attached, which is a calculation rather than a feeling once you put it through the position size calculator.

What this buys a small account

A small account cannot afford a high rate of false breaks, because each one costs a spread plus a stop. Volume will not stop you taking losing trades, but it will let you separate the setups with participation behind them from the ones without, and grading a setup before entry is one of the few filters available that costs nothing.

It also helps with a specific and expensive habit: trading breakouts during quiet hours. A level that breaks at 03:00 with almost nobody trading behaves very differently from the same level breaking at the London open. Knowing when each session actually contributes liquidity does more for your results than a better indicator will.

Four caveats on every volume bar

• Tick volume is not real volume. It counts updates, not size, so a burst of tiny orders and one large order can produce very different tick counts for the same economic event.
• It is broker-specific. Two brokers will show different volume bars for the same candle, which makes any absolute threshold unportable.
• Spikes have mundane causes. A scheduled release, a rollover, a thin holiday session, a feed glitch. Not every spike is information.
• It confirms, it does not generate. Volume has no view on direction, so any attempt to trade volume alone is really trading something else and calling it volume.

Grade your next thirty trades

Add the volume histogram to your main chart and, for the next month, write down a single number with every trade: the volume of the entry candle divided by the twenty-candle average. You now have a grade for each setup, with no judgement involved.

After thirty or forty trades, sort your results by that number. Whatever the split turns out to be, you will be looking at evidence about your own setups rather than an impression, and the change that follows is usually not a new strategy, it is refusing the low-participation version of the setup you already trade.