DLSM Forex: How to Master Trading Volume and Open Position

First, trading volume and interest in open positions are secondary indicatorsDLSMWhen trading on platforms such as foreign exchange, price is the most important factor, and volume and interest in positions are secondary. Between the latter two, volume is more important, and interest in positions ranks last.

Volume is the total number of contracts completed in a basic unit of time. Since we mainly study daily charts, we are most concerned with daily volume. Daily volume is represented in a vertical line at the bottom of the chart, below the price change. The scale of volume is marked below the price scale on the left side of the chart.

Open Interest: The total number of unpositioned squaring contracts as of the close of the market on a given day is the open interest for that day. Open interest is also depicted below the price on the corresponding date, but below the volume. Open interest represents the total number of unpositioned squaring contracts on the long or short side of the market, not the sum of the two parties. Position units are expressed in terms of the number of contracts. Open interest is expressed in terms of the number of contracts. Only two market participants (buyer and seller) can join together to create a contract. After the daily published position interest number, it is always followed by a positive or negative number, indicating the corresponding increase or decrease in the number of contracts for that day. It is the change (or rise or fall) in the level of interest that provides clues to the changing characteristics of the chart analyst's entry behavior, thus making the interest have predictive value.

Seasonal changes in open interest: A dashed line at the bottom of the open interest chart represents the 5-year average of open interest, indicating seasonal tendencies.

How changes in position interest occur: buy a new long position or sell a new short position, increase; buy back the original short position, sell the original long position, decrease; buy a new long position, sell the original long position or buy back the original short position, sell the new short position, unchanged.

The general principle of explanation for trading volume and interest in positions: the market is strong: as trading volume increases, interest in positions also increases, and prices will rise; as trading volume decreases, interest in positions decreases, prices will decrease.

Market weakness: as trading volume increases, interest in positions also increases, prices will fall; as trading volume decreases, interest in positions also decreases, prices will rise.

How to analyze foreign exchange trading volume? (Explanation of trading volume)

The trading volume of the foreign exchange market is very large, with a daily turnover of more than 2 trillion US dollars. The source of funds is of course from market traders. Market traders include: central banks, commercial banks, investment banks, various funds, investment institutions, import and export merchants and ordinary public investors.

Trading volume: A general term for the number of foreign exchange or contract transactions in a specific period of time. Trading volume is an important indicator. When there is no big story in the market, trading volume is basically a random function, independent of price.

When there is a relatively large fluctuation and the trading volume suddenly increases, if the exchange rate is at the support point, then a large sale will not be able to lower the exchange rate, but as long as a large purchase, the exchange rate may rise immediately. The reverse is also the case. Therefore, through the changes in trading volume and the distribution of exchange rates, the distribution of market forces can be roughly analyzed.

Overall, volume refers to the total number of contracts bought or sold over a period of time (typically 5 minutes, 10 minutes, 15 minutes, hours, days, etc.). The total number of contracts bought by all buyers of a contract must equal the total number of contracts sold by sellers.

1. The significance of transaction volume.

Volume levels are estimates of the strength or urgency of the market behind price movements. The higher the volume, the greater the intensity and pressure of the market.

Generally, the direction of price movement can be verified by analyzing the relationship between price changes and trading volume changes, that is, whether the price change follows the original trend or reverses or weakens. If the trading volume increases when the price rises, it means that a large number of traders are buying the market when the price rises; if the price also falls when the trading volume falls, it means that there are few sellers following the market when the price decreases.

Both of these scenarios indicate that the market is in a technically strong market. On the contrary, if the volume and price are separated, one rise and one fall indicate that the market is in a technically weak market. Because when the price rises, the trading volume decreases, indicating that market traders are unwilling to buy with the market; when the price falls, the trading volume increases, indicating that most market traders are bearish about the market and there are many sellers with the market.

2. Trading volume is often used to verify price patterns.

Price pattern analysis is an important part of technical analysis, and in price pattern analysis, trading volume is often used as a verification indicator. For example, one of the harbingers of the establishment of a head and shoulders top is that during the formation of the head, when the price reaches the peak, the trading volume decreases, and the subsequent decline towards the neckline should be larger.

In a double top or triple top, there is less volume when the price rushes to each subsequent peak, and more volume should be traded during the subsequent pullback. For example, in a triangular consolidation of a continuous pattern, the volume that accompanies it should gradually decrease.

In general, all price patterns at the end (break point), as long as the break signal is valid, then it should be accompanied by a large volume. In a downtrend, when the price falls, the volume should be larger, and when the price rebounds, it should be smaller.

As long as the change in trading volume remains upward, it means that the selling pressure is greater than the buying pressure, and the downward trend will continue. Only when this situation changes, it is necessary to search for the bottom signal of the market.

3. The limitations of trading volume analysis in the market.

Transaction volume analysis inforeign exchange marketIt is not as useful as in the stock market.

First of all, in the foreign exchange market, there is a delay in volume reporting (our country has eliminated this problem by adopting electronic trading).

Secondly, it is debatable whether the trading volume of a particular contract or the total volume of all contracts should be used as the verification indicator. As we know, all futures contracts have a delisting date, unlike stocks. It is normal for the volume of futures contracts to gradually increase and then gradually decrease from listing to delisting. Therefore, it is suggested that the total trading volume of all contracts should be used as the verification indicator. In fact, the same is true in the foreign exchange market.

However, when the closing prices of some of the different foreign exchange targets of the same variety rise, while others decline, the total volume of transactions also poses a major problem.

Finally, the rise and fall limit rules can also cause judgment problems. At the rise and fall limit, although the trading volume is very small, it is actually a very strong signal that the market is performing.

III. Weighted volume (OBV) method

The full English name of OBV is On Balance Volume, that is, the trade-off volume method, which is more commonly known as the energy tide. It was proposed by Joseph Granville in 1963 and widely circulated through his "New Secrets for Profiting the Granville Stock Market". The OBV method actually adds a volume curve along the bottom of the price chart. This curve can be used both to verify the reliability of the current price trend and to obtain warnings that the trend may reverse through its deviation from price changes.

The construction method of the OBV line is simple. First, compare the closing price of each trading day with the closing price of the adjacent previous trading day to obtain its relative height; then, before the trading volume value of the day, add a corresponding positive or negative sign. If the closing price of the day has increased, then the sign of the trading volume of the day is positive, and if the closing price of the day has decreased, the sign is negative.

Finally, a base day is selected, and from the base day to the end of the day, the daily trading volume values are obtained day by day according to the above method, and then they are accumulated by simple arithmetic, that is, according to the direction of increase or decrease of the closing price every day, from the cumulative total value of the previous day, add or subtract the trading volume of the day accordingly, and finally get the cumulative total value of the day - OBV value.

In this method, it is the trend of the OBV line that matters, not the actual level of the number itself. The OBV line should be in line with the direction of the price trend. If the two diverge from each other, it indicates that the trend may reverse. For the OBV line, various technical indicators can also be used for analysis.

IV. Volume Accumulation (VA): An alternative to the OBV method

The volume accumulation method is a workaround of the trade-off method in order to find true upward and downward volumes.

One workaround is to give more weight to days when the trend is strong, for example, on days when prices are rising, the increase in price is multiplied by the volume of transactions.

The second workaround, the volume accumulation method (VA method), was devised by Mark Chaikin to estimate the trading volume of the day using intraday price changes. This method is generally considered more useful in the stock market, but it also applies to commodity foreign exchange, especially the foreign exchange market with a large amount of public participation. The OBV method assigns a positive or negative sign to the trading volume of the whole day, but the volume accumulation method only counts positive and negative signs for a certain percentage of the trading volume of the day. Based on the relative height of the closing price to the average price of the day, that is, if the market closes above the midpoint of the average price of the day or the midpoint of the price range of the day, a certain proportion of the trading volume of the day is marked with positive signs. If the price closes below the midpoint, a percentage of the trading volume value for the day is marked with a negative sign.

If the closing price is the same as the high price of the day, the trading volume for the whole day is counted as positive; if the closing price is the same as the low price of the day, the trading volume for the whole day is counted as negative. Assume that the starting value of the base day is 10000, and construct the graph by the following formula:

VA={[(C-L)-(H-C)]/(H-L)｝×V

Where H is the highest price of the day, C is the closing price, L is the lowest price, and V is the trading volume. The combination of the volume accumulation line and the price change is exactly the same as the OBV line, which either verifies with the price change or deviates from it. In order to track the trend of the VA line, various technical indicators can also be used for analysis.

V. Explanation of interest in holding positions

The interpretation of open interest is broadly similar to the interpretation rules of trading volume.

1. In an uptrend, if the increase in total open interest exceeds the increase in its seasonal average (5-year average) when prices are rising, it indicates that new funds are flowing into the market, reflecting the bold and aggressive actions of new buyers. Therefore, this is a bullish signal.

2. Conversely, if the decline in interest in positions exceeds its seasonal decline when prices are rising, then this price surge is mainly due to short-sellers buying and selling positions. At this time, funds flow out of the market rather than into the market. In this case, once the above-mentioned process of forced positioning squaring short positions is completed, the upward trend is likely to lose its upward momentum, so this is a bearish signal;

3. In a downtrend, if the increase in total open interest exceeds the increase in its seasonal average when prices are falling, then new money is flowing into the market, reflecting the bold and aggressive actions of new sellers. This indicates an increased likelihood that the downtrend will continue, which is a bearish signal.

4. Conversely, if the price falls when the total amount of interest in the position decreases more than its seasonal decrease, then this price decline is mainly caused by the behavior of bulls who are increasingly losing money and eventually have to sell and close their positions. In this case, once the interest in the position is reduced to a low enough level, most of the above long traders have completed the process of selling the position squaring, and the downward trend is likely to end. Therefore, this is a technical signal indicating that the market is gradually strengthening.

The significance of holding interest

Other situations where interest is significant

1. When the main market trend is coming to an end, the interest in holding positions has increased to a certain height along with the entire process of the price trend. Therefore, once the interest in holding positions no longer continues to increase or even begins to decrease, this is often an early warning that the trend is about to change.

2. If at the top of the market, open interest is at a high level, and the price signal falls suddenly, then it is a bearish signal.

3. If interest in a position gradually builds up during a sideways market correction or when it is in a horizontal trading range, then once an upward or downward price breakout occurs, the subsequent price movement will intensify.

4. At the completion of a price pattern, an increase in interest can be seen as circumstantial evidence of the reliability of the new trend signal.

How to understand foreign exchange holdings

Open interest, also known as open interest, refers to the amount of contracts that have neither been hedged nor delivered at maturity until the close of the market on a certain day.

1. The relationship between trading volume and open position.

2. The general relationship between price, position, and trading volume. Description:

First, trading volume and open positions increase with the price. This shows that the number of contracts bought and sold by new traders exceeds the number of original traders' position squaring. Rising market prices also show that the market is buying gas and selling gas. The market is technically strong, and new traders are entering the market to go long.

Second, the increase in trading volume and the decrease in price indicates that more and more new traders are entering the market at this time, and the seller's power overwhelms the buyer among the new traders, the market is in a technical weakness, and the price will fall further.

Third, the volume and position squaring decrease as the price decreases. The decrease in volume and position squaring indicates that the original trader in the market bought and sold more contracts for position squaring than the new trader bought and sold contracts. The decrease in price also indicates that the original seller of position squaring in the market has more power in position squaring than when the original short bought position squaring. That is, the long position squaring is more willing to leave the market, rather than the market actively increasing the short position. Therefore, the amount of unpositioned squaring and the decline in price indicate that the market is technically strong, and the bulls are closing their positions.

Fourth, the volume and position fall while the price rises. The decrease in volume and position indicates that the original trader in the market is hedging and closing his contract. The increase in price also indicates that the power of the original short buying position squaring in the market exceeds the power of the original long position squaring in the market. Therefore, this situation indicates that the market is in a technical weakness, mainly manifested in short covering rather than active buying long.

Eight, trading volume and position interest rules

1. Only the total amount of trading volume and open interest can be used as the basis for forecasting.

2. The interest in the position must be seasonally corrected.

3. If trading volume and interest in open positions increase, it means that the current price trend is likely to continue.

4. If trading volume and interest in open positions contract, it indicates that the current price trend may be about to change.

5. Volume ahead of price. Changes in trading volume can determine the ebb and flow of buyer or seller power, so it is ahead of changes in actual prices;

6. OBV or other similar methods can reveal the direction of trading volume pressure more clearly.

7. In an uptrend, if interest in open positions suddenly stops growing or even starts to decline, it is often a warning sign of a changing trend.

8. If at the top of the market, open interest is unusually high, it is very dangerous, because this situation greatly increases the downward pressure on the market.

9. During the adjustment period, if interest in positions builds up, then the subsequent breakout of the market is strengthened.

10. The increase in trading volume and interest in open positions helps to validate the certainty of the price pattern, as well as various other important chart signals that suggest a new trend is imminent.

Nine, demand index, inflation and selling climax

Demand Index

James Siebert of California (1914-1995) created the Demand Index.

expansion

Inflation occurs at the top of the market, and the climax of selling is at the bottom of the market. Inflation occurs at the top of the market when prices suddenly rise sharply after a long period of increase. At the same time, the volume of transactions also increases significantly, but the interest in holding positions decreases significantly.

During the sell-off, prices suddenly and sharply fall on the basis of a long-term decline, while trading volume also increases significantly and interest in taking positions decreases significantly.

In this case, two things must be noted: one is the sudden expansion of trading volume, and the other is the sharp contraction of interest in holding positions. In the case of excessive upward or downward price extension, if both factors appear together, it indicates that there is a large-scale position squaring activity taking place in the market at that time, thus reminding us that the trend is likely to change suddenly.

Dealer classification report

The report, published by the Commodity Futures Trading Commission (CFTC) on the 11th business day of each month, contains statistics on position interest as of the end of last month. In this monthly report, the figures for position interest are divided into three main sources - large hedgers, large speculators, and retail investors. As long as the traders' trading size reaches the prescribed level of each market, they must report to the CFTC. After the CFTC aggregates these reports from large traders, it forms the statistics on large hedgers and large speculators in the dealer classification report. The CFTC then subtracts the above two items from the total position interest, and the balance is counted as the retail position.

The above classification of several numbers is of course useful. The theoretical basis is that it is generally believed that large players are "betting experts", while retail investors are ill-informed and backward in trading technology.

This type of analysis has long been popular among stock market technicians. According to some foreign exchange market research results, the most successful in predicting market turning points are the large hedgers first, followed by the large speculators, and then the many retail investors. Therefore, when analyzing dealer classification reports, it is necessary to refer to the movements of the "betting experts".

seasonal correction

When studying a trader classification report, one must first consider the seasonal variation of the figures in that report. Each group in the table exhibits a specific seasonal tendency. Only changes beyond this seasonal characteristic reveal a trader's attitude towards the market.