Volume Stop

When the trader expects an ongoing trend to be reversed or invalidated subsequent to a change in volume, a volume stop maybe appropriate. While volume statistics are not available for the forex market, positioning as depicted by the COT report can be used for establishing this type of stop. For utilizing the order, the trader determines a percentage value on futures positioning above or below which the position must be liquidated, depending on market conditions and the nature of the order. In the same context, other types of data can also be used to generate a stop loss trigger point. A particular put/call ratio, or option risk reversal value may all be chosen to provide the equivalent of a volume stop in the stock market.
In example, let’s consider a trader who opens a short position in a carry trader pair, confirming his trade by developments in the stock market. His expectation is that the recent rise in the stock market indexes (and the corresponding rise in the carry pairs) occurred on low volume, and will soon be reversed in the absence of new money flows. Consequently, he places his stop-loss at a volume level which, if reached in a rising market, will invalidate the starting premise, and cause the position to be liquidated. When this occurs, and volume rises above the preconceived level, the trader will close his short position in the carry trade pair