Tick volumes in Forex have sparked much debate among trading communities on what information they provide, and how they compare to regular volumes. In this article we will see whether tick volumes can be reliably used in Forex.
According to high-profile forex data published in “The Microstructure Approach to Exchange Rates” by Richard Lyons (page 201), the correlation coefficient between tick and money volume equals 0.98. Tick volumes being the number of trades, and money volumes being the net amount of bought or sold units. However this coefficient dates back to 1998, and we are interested in finding the correlation coefficient (CC) at a more recent time.
Let’s take hourly data for 2013 and include three types of volumes:
- Tick volume – we export it from Metatrader 4 connected to Alpari
- ECN – exported from Dukascopy website
- Futures volumes – exported from EUR and USD futures
I limit the experiment only to 2013 because of a limitation of available data for futures. However you can download the data for almost any period from Alpari and Dukascopy.
Downloading the data
We don’t need the OHLC. Now let’s combine all the necessary data into one spreadsheet.
The final spreadsheet has 5284 bars. Those are the bars that coincide in all the three files.
And now we can calculate the correlation coefficient:
After all the calculations we can see the following coefficients:
- CC between the futures volumes and the tick volumes (Alpari) equals 0.91
- CC between the futures volumes and the ECN volumes (Dukascopy) equals 0.79
- CC between the ECN volumes (Dukascopy) and the tick volumes (Alpari) equals 0.85
All the three numbers are in excess of 0.75. This confirms the strong correlation between all the three types of volumes, and we can freely substitute one measure for the other in our analysis.
In conclusion I’d like to note that all the coefficients are less than 0.98. in no way means that the interdependence between the volumes is trending down. The reason is elsewhere: the 1998’s data compared EBS (electronic broker system) tick volumes directly to money volume, whereas we used tick volumes from individual brokers (Dukascopy and Alpari).
Author: Roman C.