Volumes are part of a category that is very intense debated on the trading communities as it represents one of the trading indicators people have the tendency to mostly watch.
I mean, why not trading in the direction the big guys are going and volumes are the ones to show the direction, right? Wrong!
Keep in mind that when you’re looking at the Volumes indicator and interpreting data based on it, it refers only to the volumes related to that specific broker you are trading with. This means, in plain English, that the volumes you’re interpreting are only the volumes of your broker and not the ones of the entire market.
However, this does not mean we should not trade binary options based on the volumes one broker is showing and actually there is even a strategy for that.
The thing is that one should go on the hourly chart and scroll back in time and look for the last biggest volume candles in both bullish and bearish markets.
The next thing to do is to average the highs/lows and then, based on the results, to draw two horizontal lines on the volumes chart and by the time the market is reaching that volume, we should by call/put options, depending if the market is bullish or bearish.
How to Use Volumes?
Volumes are pretty tricky as they represent only the trades taken by the clients of the broker you’re making analysis with. As mentioned earlier, this may give an educated guess for the trader that trades with volumes in the sense that it is forming an idea regarding what the market is looking for, but in the end it is only an average. Still more than nothing one might say, but when it comes to trading only one spike in the volume chart, we don’t really know if that was a buy or a sell.
For example, let’s suppose you’re seeing a strong candle to the upside, a green one in volume, and this means buyers step in and would be tempted to buy call options on such a candle. However, it may just be that the trader is closing a short position from way higher levels.
In order to close a position, one has to square it, so when shorting and wanting to book the profits, traders are actually looking at buying the same position. That is the real cause of the spike higher in volume and the trap is being laid down for novice traders.
A more exact and clear way to use volumes is to look at the COT (Commitment Of Traders) that it is released on a scheduled basis and look for orientation. If there are record sellers or Euro for example, then a contrarian trade may be taken, favoring call options on pairs like eurusd, eurgbp, eurjpy, etc. If, on the other hand, there is the tendency for traders to be crowded on the short side of US dollar, then trading put options on eurusd, gbpusd, etc is the thing to do.
Adapting the Expiration Date of an Option
It is worth mentioning though that long-term expiration dates should be used in the case one is trading the COT reports as there is no straight line as how the market will react and when. There is a strong tendency that market will stay in overbought and oversold territory more than traders are staying solvent and that says much about the trading environment we’re facing.
Can volumes be traded using the classical Metatrader trading platform? Yes, they can, and quite successfully, considering that binary trading is a percentage wise result and this makes missing a trade or two not that important. What’s important is for the account to grow in time as it is not possible to grow in a straight line all the time.
What a trader should do is to take the volume indicator and plot it under a chart, ideally under the hourly chart. By right clicking on the indicator, levels can be edited and one or two lines can be placed at the medium-high of the spiking candles.
Candlesticks With Volumes
Whenever a candle is breaking those levels, it should be considered a signal or a striking price for an option. If the volume candle is green, it means it is a bullish one and call options are favored. On the other hand, if the volume candle is red, it means it is a bearish one and put options are favored. In both situations, don’t be afraid to use bigger expiration dates like the end of the day or even end of week or month in order to avoid fake signals like the ones we referred to a bit earlier.
End of month expiration dates should be always favored when the option is being taken in the second half of the month.
By trading with the system mentioned above, the trader is facing a pretty straight-forward situation: it avoids low volumes by setting the standard with the higher level candles and avoids fake signals by choosing a bigger expiration date than normal.
I would not recommend this strategy on bigger time frames than hourly chart as those volumes will indicated more fake moves and signals and the expiration dates are rarely more than the end of the month or one month.