Forex Trading Volume » Indicators and Strategies
Forex trading volume is an important tool for identifying market trends and reversals. Find out how you can use volume indicators and strategies to improve your forex trading.
What is volume in forex trading?
Volume in forex is the number of lots traded in a currency pair over a certain period of time. In other words, the amount of currency bought and sold. Volume by itself means very little, but in the context of price action and momentum it can tell us whether trends are likely to continue or not.
Volume is also related to the liquidity of a market ie. the ease with which currencies can be bought or sold. When there is a larger number of traders in the market, you are more likely to be able to open and close positions quickly and with a lower spread. Major currency pairs have the highest volumes and therefore experience the highest liquidity.
A low volume currency pair means it will have less liquidity because there are fewer traders buying and selling the currency. This is usually the case for minor and exotic currency pairs.
Daily forex trading volume
Daily foreign exchange trading volume is approximately $6.6 trillion, according to the Central Bank’s 2019 Triennial Survey of Foreign Exchange and OTC Derivatives Markets. Among these, the US dollar, euro and yen experience the highest turnover.
Currency pairs tend to experience the most daily trading volume and liquidity when the relevant sessions for the pair overlap – if both locations are open at the same time. For example, the couple GBP/USD will experience higher trading volume when the London and New York sessions are open.
» Learn more about the best time to trade currency pairs
You will also see plenty of volume for pairs around key economic data releases such as non-farm payrolls, gross domestic product and consumer price index, as well as news events. This is because any indication that a country’s economic situation is changing will cause traders to enter or exit positions, creating an influx of trading activity.
How to calculate volume in forex trading
Calculating volume in forex trading is complex because there is no single source of forex market transaction data. So when you see volumes displayed on price charts, they are usually only trades from the broker or exchange you are using, rather than global trade volumes.
In other markets, such as stocks, volume is a little simpler because there is a central order book where trades are recorded. However, this means that volume is a lagging indicator because it takes a while for data to be collected – for example, exchanges typically record volume every 5 minutes.
How to use volume in forex trading
You would use volume in forex trading to gain insight into what other traders are doing, whether they are individuals or institutions. Volume provides a key indication of which currency pairs are accumulating buy and sell orders.
A trend can only continue if new traders enter the market and give it momentum. Volume cannot tell us which direction the market will move on its own, but it can give us clues as to whether a trend is strong or weak.
High volume does not automatically translate to a higher price. An increase in volume simply means that there are more people in the market and the currencies are more likely to experience volatility due to a higher number of transactions.
Forex Volume Trading Strategy
There are several ways to use volume to trade more effectively. Here are some key forex strategies you can use:
- Trend trading
- Reverse trade
- Breakout trade
Trend trading strategy transaction volume
Volume can help traders who like to follow the general direction of movement by confirming whether a trend has started before it starts – instead of entering a position only to find out it was a false signal.
Traders want to see volume rise to join the action as this indicates that there is strength behind the market movement. If the price rises (or falls) without increasing volume, it may be a warning of a potential lack of momentum and that a reversal may occur.
Trading Volume Reversal Strategy
Some traders actively look for potential reversals to anticipate the change in direction and take advantage of the change in sentiment.
If, after an extended uptrend or downtrend, the price begins to fluctuate in smaller price movements, but still has significant volume, it may indicate that a reversal is imminent. The price movements actually show that neither the bulls nor the bears have complete control over the market.
So if you see a candlestick pattern or indicator signal that is reversing, but it is accompanied by low volume, it may not last long as there is little momentum behind it. While a reversal pattern combined with above average volume is likely to be a lasting move.
Volume breakout strategy transactions
When the price of a market reaches a support or resistance line, it can reverse or break out if the trend is strong enough. By taking a position as soon as the line is reached, traders can take advantage of the short-term euphoria that often occurs when the market breaks above these levels.
If the first breakout sees an increase in volume, it indicates that the new trend is strong. But little change in volume or declining volume shows that the market was not convinced that the breakout will last long and there is a higher probability that the price will reverse.
Since reversal trades and breakout trades show increased activity around known price levels, in anticipation of larger moves it is important to use other types of indicators – not just those based on volume – to confirm what is most likely.
Forex Trading Volume Indicators
There are several ways in which volume is used as an indicator in forex trading, including:
- Tick the volume
- Cash flow index
- Balance Volume (OBV)
Tick the volume
Tick volume shows market activity and the number of traders currently participating in trades. A single tick in forex represents a transaction – not its monetary value.
In futures markets, a tick can refer to the smallest possible change in the market price, which is to the right of the decimal point. But in forex we would call it a pip instead – although it serves the same purpose. The term tick in forex only relates to tick charts, so it is important not to confuse the two.
Tick indicators measure the number of trades that take place over a given period of time and present the changes as bars that appear below the price charts. If the volume (number of ticks) is higher in this period than the last, the bar will appear green, and if the volume decreases, it will appear red.
Remember that there is no guarantee that the tick volume will match the total trading volume, as there is no centralized exchange – you will only see an estimate based on your broker’s volume. That is why not all platforms offer tick volume indicators.
Cash flow index
The Money Flow Index (MFI) uses historical price and volume data to show the speed at which money is invested in and out of a currency. It helps measure supply and demand, which is more difficult to measure in the decentralized forex market.
The MFI helps traders spot overbought and oversold market conditions, providing insight into when a change in direction may occur. The Money Flow Index fluctuates on a scale between zero and 100 – with a reading above 80 indicating overbought conditions and below 20 indicating the market is oversold.
To use the Money Flow Index as a forex trading indicator, the theory is that if the MFI reaches 80 or 20, a reversal may occur.
Balance Volume (OBV)
Balance Volume (OBV) is an indicator that measures buying and selling pressure. It adds the day’s volume to a running total when the price of the currency pairs closes, and subtracts the day’s volume from a running total when the pair closes.
OBV is displayed separately below the price chart and is used to confirm bullish and bearish trends on specific currency pairs. It works as follows:
- When price and overall volume reach higher highs and lower lows, it indicates that the trend is likely to continue higher.
- When price and OBV make lows and lows, it indicates that the trend is likely to continue lower.
- When the price is trading in a range but the OBV is rising, it is likely that an upward breakout may occur.
- When price trades in a range but OBV falls, a bearish breakout is likely to occur.
- When the price makes higher highs but the OBV does not, the uptrend is likely to reverse – this is called a negative divergence.
- When the price makes lower lows but the OBV does not, the downtrend is likely to reverse – this is called a positive divergence.
How to trade volume in forex
To start trading volume in forex, it is important to become familiar with the tools available. We always recommend using a market simulator first, to practice trading in a risk-free environment before moving on to real markets.
With FOREX.com, you can open a demo account and trade currencies with virtual funds before putting your own money on the line.
» Open a demo account
If you are confident in trading forex volume in live markets, follow these steps to get started:
- Open a FOREX.com account Where sign in if you are already a customer
- Choose from over 80 currency pairs on our award-winning platform
- Choose your position and size, as well as your stop and limit levels
- Perform glass transaction
By Rebecca Cattlin, FOREX.com » Official Site
Disclaimer: The information and opinions contained in this report are provided for general information only and do not constitute an offer or solicitation to buy or sell foreign exchange contracts or CFDs. Although the information contained herein has been obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness and assumes no responsibility for any direct, indirect or consequential damages that may arise as a result of any reliance on such information.