Forex Volume Indicators Interpretation

Professional and senior traders believe that volume doesn’t make sense in forex trading, because this market is really different from stock market. Volume makes a lot of sense in stock market, because the number of offered stocks, supply and demand is completely clear for each company’s stocks, but it is a different story in the currency market.

I had to write an article about volume in forex, because it seems some companies are working on it and are trying to offer some volume indicators that may work on forex market. Although I don’t believe they can do it, and they can offer something that reflects the reality, as many of you ask about volume and are using it on your charts, I am going to clarify a few things about it.

I am not saying there is no such a thing called “volume” in forex market. Any market has a volume. What I am saying is that it is not possible to determine volume in forex market accurately and precisely, simply because forex market is not a centralized market.

What Is Volume?

If you are a regular investor in the markets then, there are some keywords that you could not have missed. ‘Volume’ is one such word. Be it equities, derivatives or currency trade, volume is an important indicator. From signalling the trend to setting the price, volume is the best friend an stock market investor can strive to have in the market place. So let’s understand a little more and see whether you can use this tool in furthering your currency trade and getting the maximum return on your investment, or not.

Every day a large number of trades are executed in the market. On a particular entity when a large number of trades happen or essentially that which sees a high volume trade, the price determination is perceived as more accurate. In contrast when only few trades are executed on scrip, the price determination happens via a much lower base of individuals, hence consensus for the given price is seen as relatively low. Thus, Volume in one word measures the market worthiness of a trade.  Thus, a sudden spike in volumes within a short time can signal or prepare a trader for an out of the ordinary move or sudden knee jerk reaction based on some news or related development.

Difference Between Forex & Equity Volume

Now you must be thinking a volume is volume, how can equity or forex trade make any difference to volume or its interpretation? Well it does! In the case of equity trade, ever share trade accounts for a separate entity in the total volume trade, however forex trading happens a little differently. It is impossible to keep track of the contracts traded through a given day world over.

The easiest option in this case is, volume is derived from the number of ticks or the change in prices through the course of the session on a particular day. Certain specific numbers of contracts need to be signed for a move in price so, therefore, every tick in the price of a currency pair represents this amount or volume.  Thus, we can deduce that volume plays a key role:

  1. It acts as a corroborative evidence of a change in market trend or specific direction in markets
  2. Price changes can be confirmed with the help of volume
  3. A sudden spike or fall in average volume is one of the best indicators of a change in sentiment
  4. Also, sudden surge in volume could also signal an upcoming event or expected policy action
  5. Volumes are also the earliest indicators of the beginning of a specific price change
  6. Higher volumes during an uptrend confirm the bullish tone in the market
  7. Higher volumes during a downtrend signify the bearish undertone in the market
  8. Low volumes during a price upswing indicate uptrend weakness

Types Of Forex Volume Indicators

The volume can be interpreted in various ways to facilitate accurate interpretation of the market trend and technical analysis of the trends that are underway or that need to be predicted:

Accumulation/Distributor Indicator

This volume based technical indicator is used to determine the flow of money into an asset class. This is essentially calculated by comparing the closing price with the intra-day highs and lows and deriving a weighted average with respect to the trading volume. This is a tool that is used to confirm a trend or identify the turning point of a specific trend in the forex market.

  1. If the Accumulation/Distribution line is rising on the charts, it indicates a rise in prices
  2. In contrast if the A/D line is falling, a downtrend in the specific currency trade can be confirmed
  3. You get a sign for bullish reversal if the A/D line is rising despite fall in prices
  4. Meanwhile falling A/D line along with increasing prices indicates bearish reversal

Money Flow Index/MFI Indicator

This is again an indicator based on forex trading volumes. This technical indicator gives us an idea of the intensity of money flow in specific assets by comparing the extent of rise or fall in prices in relation to the trading volumes. This will give a sense to traders & investors if a particular currency pair is overbought or oversold.

  1. For example in case of dollar-euro trade, if the MFI climbs above 80, it will be considered overbought, once this indicator crosses the overbought zone, you will get a sell signal
  2. Conversely, if the MFI slips below 20, it will be considered oversold, and a buy signal is imminent once it crosses the oversold zone
  3. In case you have a rising MFI and decreasing price movement signals weakening downward trend
  4. When the reverse happens that is you get a falling MFI with increasing prices, it signals a weakening of the uptrend in the market and again a cue to sell.

On Balance Volume Indicators

This is again a volume based technical analysis tool. It basically gives you an idea of the total deals struck in relation to price movement of a specific asset under consideration. It is a handy tool for trend confirmation and point out reversal points.

  1. A rising line stands for uptrend while a downtrend is confirmed by a falling line
  2. A fall in prices coupled with a rising OBV line signals weakening of a potential bullish reversal
  3. The contrary or a weakening of the bearish trend is confirmed by a falling OBV line with the rise in prices.

In recent developments, some brokers are likely to launch some volume indicators. According to what they say, it is expected to track volumes real-time and tests on the same are underway currently. Once finalized, this will be able to provide real currency volume using the broker’s retail platform. To start with, this will be tracking the top 14 currency pairs. This indicator is path breaking in the sense it will be able to provide data on the volume as well as the exact number of transactions on a currency pair.

Thus, far we only have indicators that give out the tick volumes for forex trading. However, this real time volume can provide that edge to your trading practices and confirm price movement a lot more precisely. This data will also be available to the public via the internet.

How Accurate These Indicators Can Be?

Broker can only see the volume of the transactions done through its own platform. It knows nothing about the whole currency market world’s transactions. In case the broker is too big and popular, the volume of the transactions it handles can be a reflection of the currency market transactions. But there is one problem here. A retail broker handles the transactions for retail traders. What about the main participants of the currency market that perform over 80% of the forex market transactions? These participants are the ones who make the price move and form buy/sell signals and trade setups, not retail traders and retail brokers. Even liquidity providers cannot provide an accurate estimation about the global forex market transactions.

The conclusion is that brokers can create some innovative forex volume indicators to attract more clients and customers. However, these indicators simply mean nothing. They just show the volume of the transactions handled through the broker’s platform. That is all.

Now that you know what volume is and what volume indicators do, let me tell you something that makes your life much much easier. You want the volume indicators or any other indicators to trade forex and make money, right? The question is do you really have to use forex volume indicators to be profitable and make money through forex trading?

The short and simple answer to this question is “No”. You already have a great indicator that shows the best time to enter the market. It is a real time indicator that reflects the real forex market activities that makes the price move and form ups and downs, and buy/sell signals. It is the candlesticks.

If you learn how to use the candlesticks, you don’t have to be worried about anything else, simply because candlesticks reflect the real, accurate and precise market events, done by all the market’s participants, not only a portion of them.

If you like to learn how to use candlesticks to see the strongest trade setups and buy/sell opportunities, here is the best place. Make your learning journey as short as possible and become a profitable forex trader within the shortest possible time, risk free. Don’t risk any time and money to become a profitable forex trader. You can do it for free and without spending and losing any money: Become A Profitable Forex Trader In 5 Easy Steps

0 0 votes
Article Rating
Categorized as Trading

By The LuckScout Team

I don't believe in luck. I believe in sweat. The more you sweat, the luckier you get.

Notify of
Inline Feedbacks
View all comments
Would love your thoughts, please comment.x

New Report