Forex Trading Volume » Indicators and Strategies

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 on its own 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, i.e. the ease with which currencies can be bought or sold. When there is a higher volume 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 Forex 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 are experiencing 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 pair 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’ll also see plenty of volume for pairs around key economic data releases such as nonfarm 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, it’s usually just trades from that broker or exchange you’re using, rather than global trading 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 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
  • Reversal trading
  • Breakout trading

Trend Trading Strategy transaction volume

Volume can help traders who like to follow the general direction of movement by confirming if a trend has started before it starts – rather than entering a position only to find it was a false signal.

Traders want to see volume increase in order to join the action, as this indicates that there is strength behind the market move. If the price rises (or falls) without increasing volume, it could be a warning of a potential lack of momentum and that a reversal could occur.

Trading Volume Reversal Strategy

Some traders actively look for potential reversals, to anticipate the change in direction and benefit from the change in sentiment.

If after an extended uptrend or downtrend, the price begins to fluctuate in smaller price moves but still has significant volume, it could indicate that a reversal is imminent. Indeed, the price movements show that neither the bulls nor the bears have complete control over the market.

So if you spot a reversal candlestick pattern or indicator signal but it is accompanied by low volume, it may not last long as there is little momentum behind it. While a reversal pattern coupled 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 breakout 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 initial breakout sees an increase in volume, this indicates that the new trend is strong. But little change in volume or falling 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.

As reverse trading and breakout trading show increased activity around known price levels, in anticipation of larger movement, it is important to use other types of indicators – not just those based on the volume – to confirm what is most likely.

Forex Trading Volume Indicators

There are several ways volume is used as an indicator in forex trading, including:

  • Tick ​​volume
  • Cash flow index
  • Balance Volume (OBV)

Tick ​​volume

The 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 on the right side of the decimal. But in forex, we would call it a pip instead – although it serves the same purpose. The term tick in forex relates only to tick charts, so it is important not to mix the two.

Tick ​​indicators measure the number of trades that occur 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 one, the bar will appear green, and if the volume decreases, then it will appear red.

Remember that there is no guarantee that the tick volume matches the overall exchange volume, as there is no centralized exchange – you only see an estimate based on the volume of your broker. This 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 rate at which money is invested in and out of a currency. It helps to measure supply and demand, which is more difficult to gauge in the decentralized forex market.

The MFI helps traders spot overbought and oversold market conditions, which provides insight into when a change in direction might occur. The Money Flow Index oscillates 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 goes 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 the price and the OBV are making 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 upside breakout may occur.
  • When the price is trading in a range, but the OBV is falling, a downside 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 to you. 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 at risk.

» Open a demo account

If you are confident in trading FX volume on live markets, follow these steps to get started:

  • Open a FOREX.com account Where log in if you are already a customer
  • Choose from over 80 currency pairs on our award-winning platform
  • Select your position and size, as well as your stop and limit levels
  • Make a 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 forex 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 which may result from the fact that anyone relies on such information.

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