Where forex volume comes from, and what level 2 data shows

Hello again. We will continue from where we left off in the previous session. As we discussed in the previous session, we saw that accessing primary markets and viewing the volume of orders within Forex is only possible through DMA. It is a possibility that is not available to retail traders. The reason is that the infrastructure is extremely expensive. So what we are actually doing on platforms like MetaTrader is that we are trading in CFDs. These CFDs are traded in a derivatives market where currency pairs, commodities, metals, stocks and so on are traded without us actually owning them. In other words, we are only trading the price difference. This infrastructure is provided exclusively for retail traders meaning for retail traders and behind this infrastructure are liquidity providers and banks. Now before we actually get into the important question of how exactly we can observe and interpret volumes in the forex market, you really need to keep in mind that as you may already know when data is published on certain financial websites from CFD brokers f that show for example how many are long there or how many are short here as sentiment data. What you're actually seeing is in reality simply the overall sentiment of retail traders which is in fact completely useless for properly analyzing and truly understanding the real market sentiment. So keep this in mind when for example I see on a certain platform or website that they're showing what percentage are long and what percentage are short based on total volume. These as we saw in the chart we analyzed are absolutely useless for us. We really shouldn't pay any attention to these at all. We're not supposed to figure out the sentiment of retail traders, 90% of whom are losing money. It's of no use to us. Therefore, what we need to learn is where to look to see the correct sentiment and the correct volume. So, as we said, these infrastructures, this particular infrastructure has actually been developed and provided specifically for retail traders with the providers being banks and liquidity providers. Now, how are we supposed to observe the Forex volume? In fact, where exactly are we supposed to see this forex volume? In order for us to be able to use volume in the forex market in some way, we turn to the futures market. The futures market is a centralized place. As you saw on the chart in the previous session, the very definition of the futures market is that for example, a commodity is offered under a contract in which you either receive that commodity or for instance receive the price difference of the instrument that has been contracted there. It is a market where in fact supply and demand are based on the future. Examples of these might be the gold futures market or the oil futures market where oil is traded. So if we want to give a general definition of the futures market, it is a centralized place where buyers and sellers from all over the world come together to enter into futures contracts. Prices are actually set in real time by the immediate balance between supply and demand from competing buy and sell orders on the exchange. Think of it this way. Imagine a place like that. But it's not like this in CFDs. If you're trading CFDs, essentially think of it as separate islands. For example, visualize this. This is one broker, broker A. This one, for example, is broker B. And this is broker C. You, as a customer, are connected to these brokers. For example, imagine a 100,000 people are with broker A, 50,000 people are with this other one B, and say 200,000 are with C. And it just keeps going like that. The trading volume of each of these is in a way completely separate from the others, like separate islands. You can't see these volumes. No one has come to connect them together either. Even if a website were to come along and connect these volumes and present them to you, the volume you'd be seeing would just be the volume of retail traders, which isn't useful for us. But how is it in the futures market, a centralized market on the exchange? If I connect from India and you, for example, from England, someone else from Germany, and another from the US, at the very moment we're all trading all at once, all of our volumes. Besides us being present here as professionals, banks are also present, financial institutions are present and there are experienced professional traders as well. Hedge funds are present. Some are real buyers, speculators are present as well. So you see the majority of the volume that forms here is created by banks and others. Banks and powerful institutions. Retail traders like us in the futures market probably barely make up 10% of the volume. And even this 10% that enters the futures market consists of traders who compared to those working in CFDs are more professional. Their analysis is stronger. Their trading style is better. Well, here when banks operate, they have algorithms and so on. All of their volume is coming here. What happens is that the volume here is an aggregated volume. Before we move on to the next slide, let me just say here that our type of supply and demand works in such a way that over there these futures contracts are offered to you. Other traders buy aggressively. Some of what has been bought is later offered again as the next type of supply like this: I bought it and then I want to sell it again. So I go and offer it there once more. A constant supply and demand can always be seen there happening in mere fractions of a second. When it comes to base metals and other commodities whose CFDs you trade, you can actually see all of their real actual volume over there in the futures market. Only the currency pairs section remains. Let me go to the next slide. Let's see what things are traded in the futures market. What are the items that are traded in the futures market? Agricultural products such as wheat, corn, soybeans, cotton, soybean oil, and similar items are essential commodities that play a vital role in food production and various industries around the world. Livestock and meat products,

beef, pork belly, and all sorts of things like these, all kinds of them. These are just very specific examples. And many of these are traded there. Metals like gold, like silver, like copper and aluminum. Basically, for every type of metal that exists, there are futures contracts. Energy is actually being traded as well. There's oil and gas which are important for us. We want to know where to get the data for currency pairs from. Take your volume. This is the section instrument. Here we can see both instruments and stock indices and most importantly we can see currencies in this section of the financial instruments market. These currencies meaning the currency pairs that are traded as contracts are found here. Let me give you an example with the euro so you can understand what it is. Every $1 million that is outside the US markets outside the United States, every $1 million that is deposited in banks is considered a contract. And this contract is then brought into the futures market as a futures contract and traded. That's how it works. Now, why is it done this way? This is implemented to control the dollar in foreign markets. They bring these in as a series of contracts. It becomes a product here and you trade this. What we see in the CFD is the chart of this not the forex chart. Although in reality the effects of the spot forex market are reflected on these. I will explain this now. What we see in the CFD is the chart of this not the chart of that forex. There are other things that are actually traded here as well. In addition to the financial instruments available here, there are also environmental commodities like carbon credits and soft commodities which are commodities such as coffee, sugar, cocoa, and the like. Each of these products that appears here has its own specific standard futures contract which defines its quantity meaning how much it is for each contract that you trade there. How much it is worth or how much of the commodity is supposed to be delivered to you or whether the price difference will be settled. All of this is there. Delivery time, quality and delivery location. All of these aspects are addressed there. Exactly. They are all written in the contracts with detail and precision. The futures market actually allows producers, consumers, and speculators to protect themselves against future prices or to profit from price fluctuations. The protective aspect relates to those who want to hedge. How do people hedge in this market? Let's say for example that I am a livestock producer. I am producing livestock today. I am raising this livestock. For example, let's say it's a cow and this cow is supposed to be sent for slaughter in 5 months. Now, if I calculate these costs and at the time of sale there is a problem or the price drops, I will incur a loss. So, I go to a company, specifically a brokerage firm, in order to have them hedge my product for me and protect me against any potential price increases or decreases that might occur in the market. The brokerage handles the hedging process on my behalf, charges a fee for their service, and as a result, my product is effectively protected from these kinds of price fluctuations. In fact, in the commodity sector, it works like this. I have a real commodity and I'm supposed to deliver it in the future. That is a single unit. Here for example, I have a commodity. I am supposed to deliver it in the future. Say 5 months later. So I am in a long position in a transaction. Meaning I have bought it. It's in my possession. I have this product in hand. I want to sell it 5 months from now. Now for hedging that company based on its strategy opens a sell position here. This is an example relative to the contract that exists here. It might be wheat. Look here. It could be wheat or something else entirely. Its harvest season is specified. That's why I say it has details. These contracts specify the quality, delivery time, and delivery location. Like for example, it has to be delivered by ship at a certain place. Are all of these referring to the cargo? It's the cargo that's on the ship. Has the cost of the ship been calculated or is it for example delivery at the factory door? These are things you might have heard about or for instance delivery at a certain port. All of these details are specified in those contracts. So it's a market where real participants are present. The reason for mentioning these points here is so that you understand the importance of the futures market. Someone who is producing oil. There is also a spot market for oil. Things you might hear like selling oil for delivery in September are actually being traded here. They are being traded in the futures market. The oil we're trading here, for example, WTI is being traded. With WTI, it's clear which contract is for the next month and how the sales for the following months are structured in specific contracts. It's completely clear that I'm trading oil and the people involved in this oil market include the refineries. Brokers are involved as well. Consumers are also involved. One point I should mention here is that those who are trading with real futures accounts must definitely pay attention to this issue. In the upcoming lessons, we'll be taking the time to thoroughly discuss the important issue that arises when contracts eventually expire. In such cases, you need to either roll them over into new contracts or close them out before reaching the contract's official expiration date. However, for those who are only using this section for analysis and are trading CFDs, this is not an issue there. So, here we saw that this is a real market where major players are present. Therefore, the volume I see in WTI oil on the futures chart, I also see this in the CFD on MetaTrader. So, I can use the level two data that exists in the futures market. I can use the direct buy and sell data and then just execute my trades on MetaTrader. So, these are the points that we need to consider here. The conclusion we draw from these pages we've studied and reviewed together is that everything you see on your display screen in platforms like MetaTrader and similar ones, these are all level one platforms. They are level one. The data such as candlesticks don't just contain numerical and quantitative information. These are reflections of the charts you see in the futures markets or the regular market which pertain to contracts that are current as well. They are actually in the contract. The current contract for example in S&P futures the chart you see is exactly copied and according to the same cycle you saw it is transferred to you as a CFD but the level two data is removed.

As for the other things you see now like so-called coffee and the things we mentioned though many of us aren't going to get into coffee and such but all of this data that exists the point is that it comes from that side whether you want to trade wheat oil or gold all of it comes from that side. The difference is that because of centralized trading on the exchange, you see the total and standardized volume in futures trading. That means what you see on the future side is centralized. You can use that. And in MetaTrader, you just execute it as a buy or sell. The volumes that are available in level two or level two data or MBO data or level three which is used in stocks. You can view these on various platforms. I mention a few examples NinjaTrader, ATAS, Sierra Chart and similar types in the upcoming topics. We can also use different platforms. This is general information that you need to know. Be aware of where these volumes are coming from and why we are focusing on them. In all the mentioned cases, the actual trading volume is shown except for currencies. That means the real trading volume you see for gold, Bitcoin and the like is all genuine. But when it comes to currency pairs, the real volume you see is for that specific pair. But it's only a portion. In other words, it's not the forex market. I want to clarify that this is how it works. Here for example, you see the 6E whose futures equivalent it's CFD equivalent is EUR/USD. For instance, you're trading EUR/USD. The volume you see here is exactly what gets transferred to this chart. A chart from which the level two data is removed. But are the trades happening in the 6E the total volume of the currency pairs market? No. Part of it is in forex. It happens in the forex market. But in this forex market, the volumes are not disclosed. However, the cash impacts of this are reflected in that. Meaning this chart and that chart move simultaneously. However, since we talked about this 6E being a contract and that banks and others are present in it, the reactions we see there are not those of retail traders. They are the banks reactions to those prices and we can see their volume. So, we can definitely make use of it. So, in all the cases mentioned, the trading volume is real. But since the forex market is a spot market and trades are made instantly, currency futures or these same futures contracts are not part of the current contract. They follow the spot price. That means their price isn't supposed to go up. For example, in futures, the price isn't supposed to drop a lot.

That's what is meant. Therefore, there is a correlation between futures trading and forex supply. We explained this in previous sections. We discussed specific trading windows that are influenced by and operate algorithmically in 5-day intervals. Therefore, from the volumes generated by these algorithms present in the futures market, we can easily identify pivot points, volume movements, and their momentum. To increase the accuracy of our trades, our analysis will be based on level two market data and our trades will be on CFDs. Look, our plan is to perform analysis on level two. Let's observe the movement because the chart you see in CFDs does not come from Forex. It comes from here. The movements are the same. The movement is the same. But here we have the volume This volume that you might see here is not useful for us. This is CFD, meaning it's just your own broker. But this one, the 6E that exists in futures, it's volume because it's centralized, the volume of algorithms and so on. All of these things that you see here, they have their effect on this chart. So, we do the careful and thorough analysis right here. And over there, we simply proceed to press a buy button or perhaps a sell button as needed. That's it. We don't do any analysis on this at all. Let's take a look at a few examples together. Let me clear up the charts. For example, I use NinjaTrader platform as an example. This instrument is 6E which is equivalent to EUR/USD. Look at the chart movement in the future. Take a look at the candlesticks.

Compare them. Look at the candlesticks for example. Look at this one. The movement is the same here as well. Actually, this is the H1 futures 6E and this one is the H1 CFD. I've also shown these to you from MetaTrader 5. So, as you can see, the movement is the same. The price you see here might be different from the price you see there. But this price difference doesn't mean that one is cheaper or more expensive. This broker might display the price slightly differently. What matters to us is the type of movement. Meaning if this candlestick is here right now and that one is also here, both of them are fluctuating at the same time. Not this one though. This one is also fluctuating here. And this one is fluctuating too. That's our criterion. For example, this one might provide prices down to the pip. Don't give this. For instance, in GBP, this one provides prices down to the pip. In CFD brokers, they even provide prices down to the pipet. So what matters to us is the movement. That instantaneous movement is important, not the price itself. The price can be shown a few pips higher or lower. You won't even find two CFDs where their real-time prices are exactly the same.

Let me go to the next slide so we can look at it together again.

All right, let's take a look at the comparison of prices and movements across different brokers. I've selected a few different brokers. Look, the futures price here is exactly 5730. At the same moment, the price here is 5532.

In this one, it's 5522. And in this one, it's also 5532. So, the price itself isn't necessarily the key factor. The type of movement is what's important. This is a one minute futures chart compared to one minute CFD charts. And actually the brokers I've chosen for you here are considered good brokers. So again, it's the type of movement that matters. Meaning it's even possible that you have a broker here where the real time price at this point matches here. It could be 55 instead of 32 or 40. But as long as the charts movement is identical to the futures, that's enough.

So we don't look at the price itself. I've already explained that what really matters is that they move simultaneously and that we don't focus too much on the price or the number of pips being shown. For example, here we're on the 6E instrument or EUR/USD. Here it's presented in the form of ticks. That means the tick movement here can be in pipets for us. The real time price will be important. All right, let's look at the next slide. There's something interesting here that we should look at together. Look, this is the identical movement of three brokers moving together. These charts you see are actually from the previous page. And after a short movement when they moved, you can rewind the video and see it. The spot where we recorded the video was here. The place where we took the screenshot was within this area. Now if you look at the futures chart, you can't do this in MetaTrader. Why? Because it doesn't have access to level two. Even if there's a tool you can add to it to display something like this, the volume you see is not the real volume. You might see an advertisement somewhere from MetaTrader where someone has written about software like this that lets you see volume by installing it on MetaTrader. If your MetaTrader is only connected to your broker, the volume data is incorrect just as we discussed. But if it's MetaTrader 5 and it receives data directly from the futures market, then it will display the volume correctly. However, I don't recommend using MetaTrader because the features that other platforms offer are usually not available in MetaTrader 5 and it's limited. Now, if you look at this chart here, it's the same chart as the previous slide. I've just added the volume tool to it. Here and here you can clearly see the movement of HFTs which are actually trading at extremely high frequency and we can effectively capture their effect by applying specific filters. The time frame is 1 minute. We can see at which prices they have injected large volumes. They have executed a lot of trades. Therefore, when the movement reaches these levels and the price drops below these two levels where they have traded heavily with a return and reaction to these areas, we can enter a trade in MetaTrader. It shows that this movement here was a reversal and we could have entered from this point and caught this move. Our stop loss here would be somewhere around 5 to 8 pips. So you see this is how we identify the movement range of HFTs from here. This gives us that advantage futures. Here we no longer need to use RSI, moving averages and so on which don't really work and are objectionable. Here we're actually observing real market supply and demand where there might have been a lot of buying but the market doesn't go up as a result. These are concepts that we will cover in future lessons. These are basically schematic representations to help you understand the foundation of how we obtain this data. All right, let's move on to the next slide. So we've seen how the correlation between price movement and the trading volume of large institutions in futures contracts which is a function of the spot price in the forex market can be used to determine price movement pauses or trends. In this way we can incorporate volume into the major currency pairs. The same method is also used for other products such as commodities and similar items. Also in this course, we will provide you with the tools you need so that you can perform further analysis with them. These are the instruments that as I mentioned can be used in currency pairs, the commodities section and so on. The main conclusion I wanted to draw so that you understand how these are correlated was mostly about the currency pairs. The hardest part was for you to grasp what is happening with these pairs. The currency pairs we will be working with in this course are the 6E or as it's also known the EUR/USD. 6B is the British pound. Then there's the Canadian dollar, AUD, USD, which is the Australian dollar, the Swiss franc, the Japanese yen, and 6N. As for indices, we have three of them. We will cover the S&P, Dow Jones, and NASDAQ, as well as oil and gold. We have access to the data for these in this course, so we can view them. In addition to that, there are many other symbols you can go and work with like silver, copper, gas and many others. There's wheat, oil, soybean oil and all sorts of these. If you have any of them in CFDs such as those instruments and also have the futures data, you can trade them. The method is the same. There's not much difference. The strategies are the same. Once you learn how to analyze with volume, how to analyze the trend and how to analyze behavior and identify the places and locations where stops occur. It doesn't matter which instrument you're in. In fact, the structure and mechanism are the same and you can easily figure this out. What remains are the nuances of the specific instrument you choose which you can also grasp with some practice. But most of the instruments we will be working with are these and these are the most liquid and most widely used instruments that other traders also trade. But the main point here was that you can actually use futures data if the CFD for it is available at your broker and you also have access to the relevant futures data then you can indeed trade it. So now that we've understood how to use volumes and considering the topics I discussed at the beginning and the importance of trends that I mentioned, our trades will be based on trends and step by step we will incorporate volume into them which is a very important point. We actually have volume. The volume itself.

The things we currently have are time, we have price as well. And now we want to actually add another aspect to this volume. So that this triangle forms for us with time, volume and price. As you can see, just how much can we further enhance and strengthen this particular factor. When volume comes into play, we can use it to determine the type of movement, the extent of the movement, the strength of the movement, and most importantly, the validity of the movement. Therefore, this is a very important point and we need to pay attention to it. Before we get into the topic of trends and how to identify them, I feel it's necessary to bring up a certain subject here even though it comes up in the next slides and that subject is in fact volume. The L section is actually about level two data. Look, the data you currently have access to, the one you see in CFDs, we call this level one data, which is what you see on your MetaTrader platform as the open, close, high, and low of the candles on your charts. Now, I'll explain this in more detail later, but for now, I just want to give you a hint because in the section where we're going to work, it's important for you to know where the tool we've built is actually getting this data from the tools you see in CTF. As we mentioned, if they display volume, they're showing the broker's own volumes, which really aren't useful for us. In level one data, we can see two prices, ask and bid. Ask is the best selling offer price and bid is the best buying price. the sell and buy prices that are shown to us, you can see them in the corner of your chart in MetaTrader and the gap between these two prices, which is always present, is what we call the spread. This is what level one brokers show you. And even if you're trading futures and don't have access to the order book, you still see the ask and bid up to a certain level, which is level one. In other words, you can see the amount of the spread. But in level one, you don't see the volume for these prices in the broker. That means you can't see how many sell orders are on the ask or how many buy orders are on the bid. However, if you're connected to futures and don't have access to the full depth of the order book, you can still see the volume on the ask and bid. For example, you might see that there are 34 sell orders on the ask side or 50 buy orders on the bid side. You can see this in the level one section. I'll explain this in more detail when we get to that part. There's also another level of the market called level two where you have access to what's known as the order book, meaning you can actually see each individual price listed in the order book itself. For example, there's a spread between this price and that price. There's a spread between this one and that one. You can see all of these. And you can also see the order volumes placed at each level in order. For instance, there are 50 here, 40 here, 30 here, and so on. And it's the same on the other side as well. In addition to this, we also have aggressive data where these aggressors come from outside the order book and start buying from here. For example, an aggressive buyer is someone who outside the order book executes their buy order instantly and buys from the ask from the side of those who are selling. And on the bid side, there are those who want to sell or aggressive sellers who can sell to these buyers without going through the order book. I will explain this in detail later. Here I just wanted to point out that we have one set of data for the order book and another set for aggressive trades. All of these buy and sell transactions appear on the charts of platforms like NinjaTrader ATAS and so on. Even if you're just looking at a plain candlestick and don't see any tool indicators inside it, these data are still embedded within it. Provided of course that the data you're using is level two data. If it's level one, these data are not included. But if you use a platform like NinjaTrader or similar ones that provide level two data, you'll have access to this information. So the more we use this data which is market volume, buyer volume, seller volume and so on and create tools that allow us to calculate the volume of movement that a trend makes as it moves along the trend. If it is moving upward, we can calculate the volume of that upward movement. So the tool we've created is not based on level one data. It's based on level two data. All right. I just wanted to mention this for now just as a reminder. When we get to that section, we'll come back and take a closer look at it in much more detail and see exactly how we can use this data. Let me go back to the slide about currency pairs. We took a brief look at these currency pairs. I also explained this part here and I've explained the data that we receive as well. Starting from the next lesson, we'll move on to identifying trends and learning the setups related to them. We will continue this in the next lesson.