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Forex Volume And How to Use It 

October 7, 2021

Read time: 6 minutes

In the Forex market, the volume can work to your advantage. ExpertOption Traders who master using it can see increased profitability. Volume affects the market in many ways. Discover how to make the most out of this knowledge. 

So, what is trade volume? Generally, high Forex volume means high liquidity. This means that buyers and sellers find each other with ease. Low volume means there are fewer counterparties for your trade, so you may be unable to get the desirable price. 

The volume moves the market. It is usually the highest when markets overlap. Common examples are the London-New York overlap or the Tokyo-London overlap.

It is a mistake to ignore volume in favour of price action. There is no reason to choose between the two. Both can and should be incorporated into your strategy. 

Now you know what is volume in trading is and how it used in the ExpertOption platform. But where to find it on the charts? It is usually reflected at the bottom in the form of small bars. To make lucrative trades, pay attention to the following peculiarities of volume indicators.

1. Forex Volume vs. Price Action

Price action is always preceded by changes in volume. This is a fundamental rule everyone should know. Here is why.

When the price stays within its range, the volume is low. This means that fewer people are buying and selling the instrument. There is no impetus for the price to move up or down. Hence, the volume does not rise. 

When you notice growth, you know that more participants are joining in. Shortly after this happens, the price starts to rise or fall. As a result, some traders rely solely on volume changes to spot emerging trends

Movements of institutional money is a telling indicator. Generally, they are registered on days when Forex volumes are low. Retail traders, on the other hand, are the most active when the volume is high. As a rule, when major players take action, individuals react and aim to benefit from the volatility. Therefore, if you know when institutions trade, you can join in instead of trading against them. 

2. No Difference Between Bearish And Bullish 

It is important to understand that volume says nothing about bearish or bullish tendencies. This means it cannot foretell the direction of an emerging trend. It merely shows that buyers and sellers are active. Consequently, traders should not rely on volume alone.

Some volume indicators do indeed reflect the market sentiment. Some colour-coded measurements reveal if the prices were bearish or bullish. Usually, bearish movements are marked in green, bullish in red, and white is used for neutral periods. This is similar to the colors used on candlestick charts.

3. Trading Volume Accuracy

The foreign exchange is an over-the-counter market. This means there is no physical centre. Buyers and sellers connect directly over the internet. 

In comparison, the stock exchange and the futures market are both centralized. It is easier to assess volumes in such systems. Estimates are based on official numbers of contracts and contract sizes.  

Since there is no intermediary, there are no official reports on the volumes of Forex trading. Different brokerage companies publish different data. Sometimes, the figures you see describe the volume traded exclusively through this specific broker. It is preferable to work through a broker with an impressive number of clients. In theory, this should give a better understanding of how much is actually being traded.

Some ExpertOption Forex traders use TradingView as their source of volume data. This tool combines feeds from different brokerage firms. It provides a more accurate view of the market situation. Still, questionable reliability is just one problem.

The second issue is that charting software reflects the so-called ‘tick volume’, not the actual volume traded. This indicator measures the number of times a price ticks up and down. It is used to see how strong the trading activity is within a bar. The disparity between tick volume and real volume is high. In fact, it can reach 90% in some cases.

The best way to use volumes is alongside price action. This provides more clarity, and you have more data for informed decisions. 

Do not trade based on past movement, and avoid trading separate bars. Look at several bars before and after your trading action. If you expect an uptrend, look out for a robust movement that spans at least 3 green bullish candlesticks. 

Volume cannot always be trusted. Therefore, it is a bad idea to let a certain point trigger your action. Always look for strong confirmation.

An exception is when you trade volume while following a trend. If you notice the volume dropping, this should prompt you to get out of the market. The trend you are looking at is weakening.

Three Useful Forex Volume Indicators

Trading volume can be measured in a variety of ways. Check out these three useful indicators. They will help you incorporate Forex trading volume into your decisions wisely.

1. VWAP 

Volume-Weighted Average Price deserves your utmost attention. This indicator reveals the average price for a pair traded during the day. However, it can tell you more than any ordinary moving average. This is because of the indicator factors in the volume of trading

On the one hand, VWAP distinguishes the underlying trend. On the other hand, it shows how much security is worth. Besides, it can show you that a trend isn’t as strong as it looks.

So, how is VWAP used in practice? Generally, the approach is similar to that for moving averages. Traders aim to buy below or sell above the indicator. 

Day traders find it the most useful, as it reflects volume throughout the day. VWAP allows them to engage in their so-called ‘end of day play’. This is possible when the VWAP differs significantly from the current trading price. A volume trader may buy at the end of the day if they suppose the movement will continue the next day. Other traders prefer to delay trading until the next day.

2. OBV (On-Balance Volume)

This is one of the most useful Forex volume indicators. It allows you to see whether the actual Forex market volume is bearish or bullish based on the market sentiment for that day. 

You will notice similarities between OBV and the current price on the charts. However, the former is slightly more skewed with uptrends and downtrends. This makes it easier to identify market movements. 

However, there are a few caveats. OBV may give false signals at times. Therefore, volume traders should not fully rely on it. Never trade without confluence. 

3. Klinger Oscillator

This is another handy volume-linked indicator. The Klinger Oscillator measures the monetary flow over longer periods. However, it also demonstrates sensitivity to short-term changes. In practice, it is usually accompanied by the 13-period moving average.  

By applying the indicator, traders can determine whether a trend is positive or negative. They can open a long position when a trend is only emerging, and short-sell when it begins to weaken. 

Here is how to use the indicator. Look at the position of your 13-period MA relative to the Klinger Oscillator. If it crosses over the indicator, this is interpreted as a bullish signal. In the opposite situation, a bearish signal is deduced.

Three Rules of Volume Trading

The first rule for any aspiring volume trader is: keep it simple! Complicated strategies are difficult to repeat, and mistakes are more likely. Avoid using too many additional indicators, as you will get confused. One or two indicators plus volume make a good combination. 

The second rule is: never use more than one volume indicator for the same trade. Otherwise, the signals may contradict one another. One sign will be bearish and the other one bullish, leading to choice paralysis. 

Some people suppose that successful volume trading should give you over 75% of winning trades. However, too much depends on your personality and skill set. A trick that works for someone else may not work for you, and vice versa. 

Summary: Trade Volume Wisely

In Forex, there are no shortcuts to success. When trading on volume, caution is paramount.  Several sources of data exist: volume charts at the bottom of your screen, Volume-Weighted Average Price, On-Balance Volume, and the Klinger Oscillator. However, these do not provide a sufficient basis for decisions. 

The Forex market is decentralized. There is no physical exchange that would release official data. This makes volume calculation a real challenge. Figures released by brokers usually only describe volumes traded through them. Overall, accuracy is questionable. 

As a result, traders should not use volume indicators alone. They can and should serve as additions to their strategies. For example, it is reasonable to combine volume with price action. Remember that volume says nothing about bearish or bullish trends. 

Volume traders should follow simple strategies and use three indicators at most, including volume. Wait for confluence before making big decisions. Unfortunately, indicators may provide false signals, so you should always seek confirmation. 

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