How To Use Volume To Improve Your Forex Trading
Becoming a forex trading expert requires a lot of dedication, patience, and sacrifice. It is also a continuous learning process, and the more you learn, the more likely your growth will be. There are many ways to approach forex, but our focus on this press will be on volume.
What is volume in forex, and why is it important?
Volume in forex trading can be described as the number of trades taking place on a particular currency pair. For example, if the U.S dollar attracts a lot of buyers within a specific duration of time, such as 10 or 30 minutes, its volume will be higher. However, when the dollar’s trading volume is low, it indicates that few buyers are willing to invest in it. (Source: Blackwell Global)
Volume is an important metric when trading because it helps traders to determine times of high volatility or low volatility. Such factors may determine how effective your strategy will be. Volume patterns are also effective in demonstrating the strength of a forex trend, making it an important consideration for technical analysis.
Observing the volume prevailing during a market session with the right knowledge may help you respond effectively to potential market opportunities. For example, low volatility at a certain time of day due to low trading volume might be followed by an influx of trading activity, resulting in significant volume changes. Knowing how to react to such a situation may provide money-making opportunities.
Since volume is one of the key factors determining price momentum and sometimes price direction, it only makes sense for traders to incorporate it into their strategy. There are numerous ways in which you can leverage volume into your strategy. The good news is that you do not necessarily have to develop a new strategy but can be incorporated into your existing strategy to make it more efficient.
Tips on implementing volume into your trading strategy
Determining the actual volume numbers in forex is impossible because it is a decentralized market. However, observing tick movements within a particular time duration allows traders to understand the prevailing trading volume. There are multiple ways in which traders can use volumes to enhance their strategy and trading success:
- Determining bullish momentum
Forex price movements are characterized by bullish or bearish movements with price corrections. Volume can be used to determine if price performance is overall bullish if there is a price increase, followed by a smaller decline and an increase to a higher price point than the previous price performance. If a price pullback fails to reach the same price point as the previous low, it is an indicator of bullish momentum, especially if there is lower volume on the second decline, paving the way for an uptick.
- Trend confirmation
Demand tends to push prices up in the commodity market, and forex works the same way. For example, a currency pair may experience a lot of buying, which usually pushes the price higher. Strong demand may thus be used for trend confirmation. A higher price with reducing volume might be a sign that the directional strength is not strong. Watching out for strong volume on a trend can thus provide the confirmation necessary before executing a trade.
- Determining the potential end of a trend
Volume is not only a great indicator of momentum but also momentum exhaustion. For example, in a bullish trend, a sudden shark volume spike might indicate the trend’s end. This may seem counterintuitive but the fearful buyers jumping onto a trend means buyers are exhausted, thus paving the way for a potential reversal.
The number of buyers does not just influence market volume. The number of sellers at any given point also determines the trading volume. A trend may push out many traders when it bottoms out, leading to a lot of selling due to stop-loss, leading to more volume. A volume decline may follow in such situations.
- Reading breakouts
Volume may help determine whether a breakout is legitimate or false. A volume increase may indicate a potential breakout, but it could also be a false breakout. A breakout with little volume change might indicate that traders are not interested, while a strong breakout with a consistent volume increase indicates a legitimate breakout. (Source: Investopedia)
The best volume indicators to incorporate into your strategy
There are numerous indicators that traders can use to observe volume changes. Here are some of the best examples:
- Chaikin Money Flow
Price increments should have directly proportional to volume increase. This indicator is tuned to help traders to identify such moments. If the price trades in the upper or lower levels of its daily range, then the indicator should provide a value that corresponds with the strength. If the closing price trades in the upper section of the daily range with an expanding volume, then the indicator value will be quite high. If the price closes in the lower daily range, the indicator value should be negative. Chaikin Money Flow indicator is an ideal short-term indicator because it an oscillator commonly used to show divergence.
- Klinger Oscillator
It indicates the buying volumes or the selling volumes at any particular time frame. It can be a powerful tool when observed alongside price performance charts. You can use this strategy to make trading decisions based on various volume-related price changes.
- On Balance Volume (OBV)
This indicator is commonly used to indicate divergence, for example, when a price increase is characterized by volume increase although at a lower rate or even declining volume. The indicator can determine whether a currency pair price is oriented towards a bullish or bearish performance. (Source: Trading Strategy Guides)
Based on the above findings, adding volume into your trading strategy might significantly improve your trading outcome because it provides a good market trend overview. Trend confirmation and other benefits of using volume allow traders to make more informed decisions before executing their trades.