Trading volume analysis

October 31


Posted by: Lorraine Longman,
 October 31, 2020

Minute Read

How Forex Volume Trading Works

Like any market, Forex has its own volume and ways to measure it. Traders use it to make decisions and profit from ever-changing currency rates. But how exactly does it work? Here are the fundamentals of volume trades in the largest financial market. 

This knowledge is essential for every trader. Discover what volume means and how to check it via your platform. This data gives confirmation for your decisions, so winning trades are more likely. Rising volumes indicate reinforcement. This is true for any trends and markets. However, analysis differs from what equity traders use. So, what is the volume in trading on Forex?

Specifics of Volume Trading

The foreign exchange has no physical center. This colossal global market is accessed through the Internet. Institutions and retail traders buy and sell trillions of US dollars daily. 

You may be puzzled by the differences in estimations. Various sources cite different turnover figures – 4 trillion, 5 trillion, or even 6+. This presents a problem with trading volume analysis.

Of course, this over-the-counter format has advantages. On the one hand, buyers and sellers find it easier to connect through electronic systems. Do you remember old Hollywood movies about stockbrokers? This is how pit trading worked. You would call a floor broker to initiate every single operation. Now, all you need is software, access, and skills. 

The downside is the absence of centralized data. In the stock market, details of all contracts and contract sizes are recorded by a single entity. Forex brokers, however, may only provide the numbers for trades that go through them. For example, any bitcoin trading volume figures you find will be approximate. Hence, if the volume in trading is so tricky to measure, how can it help you? The secret is that Forex traders do not care about the number of orders or the total turnover. They only look at tick volume.

Definition of Tick Volume

Each tick is a single change in the price – either upward or downward. The MetaTrader terminal shows the number of ticks over a period of time. Looking at it, you can see how actively the market was trading.

Why not count the number of orders, you may wonder? This is impossible, as the system is decentralized. What you can do is check the tick number. Now, let’s look at this dimension of volume in practice.

The platform has a number of volume-related indicators. To use them, select the ‘Insert’ option, then ‘Indicators’ and ‘Volumes.’ You will see four options described below. Choose one or use several – the choice is yours.

Read: Forex robots can do the trading for you. These tools can bring profit, but they must be used with caution. Here is why.

1. Volumes

This shows the number of ticks registered within a period, depending on your timeframe. Two colors are used. Bars showing decline are red, and green indicates growth.

2. On Balance Volume (OBV)

OBV is a straight line on your chart. The indicator can provide trading signals. Some experts suggest its changes precede price swings.

The direction depends on close prices of the current and previous candlesticks. If the former is higher than the latter, the line goes up, as more volume is added to it. If the opposite is observed, the line goes down, as the current volume is deducted from OBV. 

3. Money Flow Index (MFI)

MFI is a technical oscillator. It shows you how actively money is going into and out of an asset. This way, you can identify overbought and oversold conditions. This indicator is similar to RSI or relative strength index. You may interpret it as RSI based on volume.

4. Accumulation/Distribution

This indicator is based on both volume and price. The higher the former – the stronger the effects of price movements. 

volume trading

Volume in Technical Analysis

Now that you know the theory, we can move on to practice. Volume indicators are often telling and convenient to apply. Here are a few suggestions for users of the MetaTrader platform. These are the keys to an efficient volume trading strategy.

1. How Strong Is the Trend?

To confirm strength, look at volume. If it is growing, the market is interested in the movement. When a currency is rising, the volume of trading is also going up. These are typical signs of an uptrend. Falling prices cause volumes to shrink. 

Downtrends can also be traded for profit. In these situations, the volume grows as the price falls, and vice versa. Every trend may see corrections. Look for confirmation before opening any trades. If you see a peak that is not confirmed by volume, the price may go down soon. 

2. Look out for Reversals 

Traders may confuse correction with the initial stage of reversal. At this point, distinguishing between the two is indeed challenging. This is where Forex trading volume comes in handy. It provides the necessary confirmation. By using the indicator, you can spot reversal sooner and ride on the new trend.

Read: Major events on Forex move currency prices up or down. Here are several important examples to be considered if you want to be a pro. 

So, what patterns indicate impending reversal? For example, this is the “Head and Shoulders” shape on the candlestick chart. If the volume is weaker at the top and even more feeble at the second shoulder, decline is likely to continue. The market has clearly lost the impetus to grow. On the other hand, if the price and volume go in different directions, reversal is likely. 

3. Confirm Every Breakout

Do not trust a pattern unless the volume supports it. During consolidation, volumes are typically low. You need a spike that coincides with the breakout. This shows that the latter is probably real. For example, when the price rises above resistance, the volume should also grow to support the movement.

4. Identify Strong Support and Resistance 

When the volume is high, you can spot points for lucrative entry and exit. These areas present obstacles for the price. The indicator will help you identify and use them.

Example: Volume Profile Trading

Volume profile trading is an advanced strategy. Its purpose is to spot significant or dormant price levels over a certain period. It identifies zones where most volume has been traded. The result takes the form of a histogram plotted on the price scale. Traders may apply it to a time range, session, and all data on their screens. 

First, the system considers the overall volume traded at a certain price. Next, it divides it into two: buy volume and sell volume. As a result, you can assess activity at a particular price level over a particular period. 

This method can be used in different markets: Forex, cryptocurrencies, stocks, and even futures. Whatever the asset, you can see the most traded prices for a certain period. 

Do Not Overuse It

Never rely on volume alone – combine it with other indicators. Every decision should be based on at least two factors. Forex volume by itself is useful, but you should always seek confirmation. The MetaTrader platform has a number of volume signals for lucrative trades. If you want to see how active the market is, the volume is the first thing to consider. Overall, volume trading is a method worth trying. Incorporate it into your strategy to make effective and informed decisions. These indicators are helpful, and they should not be overlooked. By trading on both volume and price, you can achieve a lot.

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