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Forex Volume Trading Strategy
KEY TAKEAWAYS
- Forex volume is the number of lots traded in a currency pair each day.
- Volume should be looked at relative to recent history.
- The higher the volume during a price move, the more significant the move and vice versa - the lower the volume during a price move, the less significant the move will be.
- When prices reach new highs or new lows and volume is decreasing, probably reversal is taking shape.
Forex Volume Trading Strategy
Volume Trading is the number of securities traded for a certain time. The higher the volume, the higher the degree of pressure, which, depending on number of nuances, can indicate the beginning of a trend. Volume analysis can help understand the strength in the rise and fall of individual stocks and markets in general.
To determine that, traders should look at the trading volume bars, presented at the bottom of the chart. Any price movement is more significant if accompanied by a relatively high volume + a weak volume. Not all volume types may influence the trade, it’s the volume of large amounts of money that is traded within the same day and greatly affects the market.
What is Forex Volume
Forex volume is probably one of the most important tools traders have at their disposal. Volume in Forex is based only on the individual pair on a given exchange at that point in time. That’s why it’s sometimes overlooked.
Forex volume is the number of lots traded in a currency pair each day. Volume is one of the most accurate ways of measuring money flow. Indicator tells traders about market activity and liquidity, that is, higher trading volumes mean higher liquidity. If you are new to Forex trading, it is best to start with the basics, “What is Forex”.
From the chart above, which is the GBP/USD, volume indicator, paints quite accurate even foreseeing the price picture. Using volume indicator traders can see whether the events, such as economic data publishing, breaking news have influenced the market.
Note: Volume overall tends to be higher near the market's opening and closing times and on Mondays and Fridays. It tends to be lower at lunchtime and before a holiday.
How to Trade with Volume
Volume shows how the market moves - the more volume, the easier it is to decide when to buy or sell (volume can’t tell the difference between bear and bull markets). Volume precedes price action, here are a few general steps to take, before making trading decisions.
1. Trend Confirmation
Traders need increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, this might be a warning of a potential reversal. A price drop (or rise) on little volume is not a strong signal. A price drop (or rise) on large volume is a stronger signal that something in the stock has fundamentally changed.
2. Exhaustion Moves and Volume
In a rising or falling market, we see movement exhaustion typically, sharp price movements, combined with a sharp increase in volume, signal the potential end of the trend.
3. Bullish Signs
Volume can be useful for spotting bullish signs. For example, volume increases when the price falls, and then the price moves up and then down again. If the price does not fall below the previous low when it moves back, and volume decreases during the second decline, then this is usually interpreted as a bullish sign.
4. Volume and Price Reversals
If, after a prolonged price move higher or lower, the price begins to fluctuate with little price movement and large volume, this may indicate a reversal and prices will change direction.
5. Volume and Breakouts vs. False Breakouts
On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout speaks of lack of interest - higher probability for a false breakout.
6. Volume History
Volume should be looked at relative to recent history. Comparing today's volume to 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant results are likely to be.
Bottom line on Volume Trading Strategy
Volume is a handy tool for studying trends, and there are many ways to use it. Basic guidelines can be used to gauge market strength or weakness, and to test whether volume confirms price movement or signals an impending reversal. Volume-based indicators are sometimes used to aid decision making.
