FX tick vs true Volume.

I see that TradeGuider is pimping their VSA to FX traders saying that tick data can be used as a substitute for true volume. Now to me that seems like someone selling a product rather than a method. Changes in price do not correlate exactly to changes in volume. Sure there is a link there but is it not the whole idea of VSA to find the hidden supply & demand within the market relative to recent moves and volume?

When I first heard this idea my first reaction was surely this is counter to some of the main principles they push. For example how is a tight range high volume bar going to show up as high amount of ticks? Its not. And at the opposite end any bar that has a relative large range, or spread, is always going to show a large amount of ticks irrespective of the volume traded simply because of the many price levels it moves through. The Volume traded could be quite small yet you will get the opposite showing as ticks.

I have compared last nights pre & post Fed Funds Rate announcement as a way of investigating FX tick vs volume. I have used IB's ECN, FX Pro, to capture volume and ticks to compare them. I have changed the data to % of the maximum bar so they can be compared. Each bar is 1 minute of data. The chart action looked like this,

So from just the price action you can say that the set up pre announcement is a steady trending down market. Then post announcement is some wild up moves followed by retracements and expanding upwards range bars.

Here is what the volumes looked like during that time,

 

What I see here looking at the tick and volume is that there was relatively good volume on the fall pre announcement suggesting that there was underlying demand yet looking at the tick data it was very low suggesting no demand as prices got cheaper.

Then after the announcement as the volatility went wild the reading reversed. Ticks clearly exploded as well as the volume but the volume fell off pretty quickly suggesting a lack of selling into the post announcement higher prices. Resulting in larger spread bars on less and less volume. While the ticks went nuts and stayed relatively high. Confirming my initial thoughts that ticks will expand with spread rather than true volume. Some what counter to finding hidden supply and demand I would of thought.

This to me sees a clear example of ticks giving opposite signals to actual volume. When you have a closer look at the bars there seems to be even more evidence of the danger of trying to read supply and demand from tick values,

 

 

 

Comments

[Amrit Singh Aujla]

This was an excellent article, great work.

The explosion in ticks also causes higher volatility, hence higher spreads and in-correct data. Alot of people do not understand that transactions of 2 to 3 ticks, might be 500,000 shares of actual volume, and should be taken into serious consideration.

Well done and pretty amazed

Amrit