If you want to make the most of your forex trading, then one thing that you should definitely keep in mind is volume. This critical indicator can help inform many aspects of your trades, from entry points to risk management strategies, and as such understanding how it works will go a long way toward helping you achieve success in the market. This indicator is as important as the economic calendar, which helps to be updated on events in the markets.
Let’s take a look at exactly what forex trading volume is, how it impacts currency prices and some strategical approaches for using it to maximize your profits with each trade.
What is the volume in forex trading?
Volume in the forex market is an indicator of how popular a currency pair is – it measures how many lots are bought and sold over a given period. It can be used to determine whether current trends will persist or not by studying price action alongside volume levels, providing valuable insight into potential future movements.
It is a key factor when it comes to the liquidity of a market, which measures how easy it is to buy and sell currencies. The more volume there is in a market, the easier and quicker it is to open and close positions, as well as have a lower spread. The major currency pairs consist of the most traded pairs in the market and naturally also have the highest volumes, meaning they experience the most liquidity as well. For this reason, many traders prefer to trade these pairs due to their ease of trading.
Forex volume indicators
There are 3 indicators we would like to introduce now.
- on-balance volume
The on-balance volume (OBV) is a technical analysis indicator that helps traders identify when buying and selling pressure in the market may be shifting. When prices close higher, OBV adds to its cumulative total with the day’s trading volume. Conversely, if prices close lower it subtracts from this sum.
As such, it provides an insightful glimpse into what could potentially happen next in currency pairs markets.
- money flow index
The Money Flow Index (MFI) can provide a snapshot of the rate at which money is flowing into and out of a currency, allowing traders to gain insight into supply and demand dynamics that would be difficult to assess in the decentralized forex market.
Its historical price data combined with volume readings will help traders make smart decisions about deals.
- tick volume
Tick volume is an important measure of market activity, providing insight into the number of traders participating in transactions. Every single tick on a forex chart indicates that somebody has made a transaction, regardless of its monetary value.
Forex volume strategies
Now let’s take a look at 3 strategies of forex volume:
- trend trading strategy
Volume can be a valuable tool for traders looking to capitalize on the current market trend. By monitoring volume levels, they can ensure that any signals they receive are genuine before entering a position – avoiding costly false alarms.
- breakout trading strategy
Traders can take advantage of instant opportunities and capitalize on the market’s momentum by entering a position when prices hit an established support or resistance line.
If the trend is strong enough, it may even lead to a breakout beyond these levels, providing potential for short-term gains from any resulting euphoria in the market.
- reversal trading strategy
Some traders often search for signs of a potential reversal in the markets, hoping to capitalize on an upcoming shift in sentiment. When prices start moving sideways after experiencing either prolonged upward or downward trends but with high trading volume, it could suggest that a reversal is looming as neither bulls nor bears are able to control the market.
Understanding forex trading volume is essential for all traders. After reading this article, you should have a better grasp of what it is and how to use it to your advantage.
Use the information to make informed decisions when trading. Remember, there is no one perfect strategy, so don’t be afraid to experiment until you find something that works for you. And as always, continue to learn and refine your skills so that you can become a successful trader.