It is very important for a Forex trader to make informed and smart decisions in buying or selling a currency pair. But, to perform that you gotta understand when to buy or sell a particular currency at any given time. This is why all Forex traders must have a trading strategy for generating trading signals. These trading signals allow traders to take hard decisions of selling or buying. Now the real question is,
Would you purchase a Forex trading strategy or develop it all by yourself?
An off-the-shelf strategy comes from automated methods for generating trading signals where the trader develops an algorithm in finding the trading signals and executing the trades. However, in manual methods, a trader used to sit down in front of a system looking for trading signals to understand and interpret whether to buy or sell.
The automated methods keep human sentiments out of the equation for improving the performance. But, as the name implies, it is automated. You can’t just fully rely on it. That’s why we would recommend you to go manual in finding the trading signals and creating a suitable Forex trading strategy while dealing in Forex market.
In order to do that, you have to calculate the Trade Volume Index (TVI) which measures the amount of money flow in or out of the market. Monitoring the TVI is one of the best ways to make a Forex Trading Strategy which shows whether the securities are accumulated or distributed.
First, let’s find out “how we can calculate the Trade Volume Index (TVI).”
Trade Volume Index (TVI)
In calculating the trade volume index, you need to figure out three things –
- Min. tick value of Security
- Change in Price
Min. tick value of the security is given but to change in price, you must subtract the last price from the current one. If we talk about direction then there are two common directions security can move to. First is, accumulation Period and second is distribution period. These are both momentum indicators that strive to gauge supply and demand by determining whether investors are buying or selling a certain stock on the basis of divergence identified b/w volume and stock price.
In the context of stock’s price, if the change is greater than the minimum tick value then the security is in accumulation period but if it is less then it is in distribution period.
How to Use it To Create a Forex Trading Strategy?
There is no magic formula in creating a Forex trading strategy but it is not like we need one. By simply monitoring the TV, you can gauge the momentum of a currency. If TVI increases you can look to buy otherwise, you can look to sell if there is a decrease.
Increase in TVI means other traders and investors must be accumulating the currency and decrease in TVI means they are distributing the currency.
Now that you are clear about the direction and TVI nature, you can build a strategy to see how currency reacts at its key resistance and support levels.
Apart from this, you can consider the Entry & Exit Points, Position Sizing, and Market Choice to make an effective trade volume index.
Final Thoughts: –
A Forex trader always beware of theoretical or automated strategies and focus more on practical approach. This will not help you in making smart decisions but also improve your skills. And don’t believe that a single strategy can work as a one-for-all. Sometimes, you gotta change your strategy due to risk management or market conditions.
Nevertheless, just stay on track and monitor the trade volume index on regular basis.
If you have any query or would like to share something, then don’t forget to mention in the comment section below.