There are different aspects of trading forex. A trader can decide to use technical indicators, fundamental analysis, or perhaps depend largely on sentiments from other traders. However, volume trading is an essential concept that most new traders haven’t understood how to use it successfully. Besides the traditional knowledge that traders know of using it as a filter for trade signals. There are other ways to use it properly.
There is a misconception that the volume information provided by your broker isn’t reliable or useful for a trader. Some traders rely on the forex volume indicator to analyze the current volume of the market. According to research, such volume is worthwhile even though they don’t provide an accurate reflection of the entire changes taking place in the market. In this article, you will learn essential fundaments of volume trading in the forex market.
What is Volume in Forex Trading?
Volume is the amount of a currency pair traded within a given time. Traders can analyze the entire market sentiment by correlating volume levels with price data. Volume gives traders an upper edge in the market, to make informed decisions. Volume trading gives traders a sense of what is happening in the market. It indicates the strength and weakness of a trend, accumulation, and exhaustion of the market.
Despite this, it is hard to determine the precise amount of currency traded at a given time since the market is decentralized. As a result, most traders overlook volume in forex trading. Notwithstanding, with the right tool like a forex volume indicator, traders can take advantage of volume data to sharpen their trading techniques or strategies.
Tick Volume in Forex Trading
When we talk about tick in volume, it refers to a single change that takes place in the currency price quote, which can be upward or downward. A tick represents a trade, which signifies that an essential spike in the tick volume shows that many traders have closed or opened trades within that period.
It is easier for a trader to buy and sell currency pairs at a particular price because numerous traders are looking to take the other side of the trade. This is what we call market liquidity. When the volume is high, it indicates that buyers are in control, whereas when the price is declining, sellers are in control. With a good forex volume indicator, you can know when there is a high or low volume in the market.
Nevertheless, there exists a difference in the actual volume traded and the tick volume. There is a high positive correlation between the actual volume and tick volume. Studies have shown that there is an over 90% correlation between real volume and price updates. At such, one can confidently say that the tick volume of a currency pair has essential information for traders to use.
Significance of Volume during high impact news releases
There are notable news releases in the market. These include monetary policy decisions by central banks of different countries, Non-Farm Payroll Report, employment reports, etc. This news reflected in the candlesticks usually indicates high trading activity. For traders who don’t trade before any high-impact news is release may find this strange. The increased volatility in the market during this period may result in unpredicted losses.
Trading volume is quite useful for traders who understand it correctly. However, we have traders who discount volume trading as useless because of the non-availability of official volume data. Notwithstanding, traders have the option of appreciating volume data provided by their brokers. Those using volume data must not trade solely on that pretence; this must be in combination with other metatrader trading indicators for efficient results.
Forex volume indicator in Technical Analysis
The popular MetaTrader 4 has several forex volume indicators to provide insight on price movement. Here, let us explore some of the best forex volume indicators in MT4.
Money Flow Index (MFI)
Money flow index is the rate at which money flows through a particular currency or withdraws from it. Most traders use it similarly, as the relative strength index indicator. However, the money flow index considers volume.
On Balance Volume (OBV)
On Balance Volume appears in a line format on the charts. If the present closing price is above the previous closing price, then the volume is added to the OBV. Furthermore, if the current closing price is the same as the last price, then the volume doesn’t change. However, if the current closing price is below the previous price, then the previous price is subtracted from the current closing price. It is one of the most utilized forex volume indicators in trading.
The easiest way to interpret and use volume wisely is through this forex volume indicator. It shows the number of ticks. Even as a novice, you can understand it pretty well. The volume bar will turn green when it is bigger than the previous one. However, if it is lower than the previous one, then it turns red.
Point To Note
Along with other technical tools, you can use forex volume indicators for different strategies. For instance,
1. To find new trends and identify early price reversal
2. To gauge the strength of a trend
3. To confirm breakout
4. To identify areas of support and resistance
Conclusion of Forex Volume Indicator
Measuring volume is essentially a useful practice when trading in forex. The volume allows traders to know the strength and weakness of a currency pair. Additionally, you can identify price reversals and strong trends. There is a lot of importance devoted to using a forex volume indicator to help trade volume properly.
1. Volume can help traders identify the end of an accumulation and distribution period
2. Identify when prices breakthrough areas of support and resistance
3. Identify the strength and weakness of a price movement
There are numerous forex volume indicators such as Money Flow index, on-balance-volume, and volume indicators to use. These indicators help to identify critical areas of interest.
However, there are alternatives available on our platform to help you get better and achieve quality results when using any forex volume indicator, so check out this link and write a new chapter of success in your life.