Trading volume in forex
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omid - Blog
omidIntroduction:
The forex market is a huge and dynamic global market where we can buy and sell all kinds of currencies. With an average daily trading volume of more than $7.5 trillion in 2023, the forex market is the largest and most liquid financial market in the world. For this reason, trading volume in forex is considered a useful tool for traders in understanding market dynamics. In this article, we will first explain the volume of transactions in forex and then we will learn how to calculate it.
Definition of trading volume in forex
Trading volume in the forex market refers to the total number of currency units traded in a certain period of time. Unlike the stock market, which consists of centralized exchanges, the forex market is decentralized and operates through a network of banks, financial institutions, and individual traders over the counter (OTC). Although there is no central body in this market that provides accurate volume information, we can still gain valuable insight into its activities by tracking the volume of transactions in this market.
Why is it important to understand trading volume in forex?
Understanding trading volume in forex is like looking at the heartbeat of the market. It is this volume that helps traders measure the intensity and strength of a currency pair’s price movement and get clues about the level of participation of buyers and sellers. The reasons for the importance of transaction volume are:
1. Confirmation of market trends
If the trading volume is high during an uptrend or downtrend, it indicates that you have correctly identified the trend. Volume indicates strong sentiment in the market and confirms that buyers believe in an uptrend or sellers believe in a downtrend. Therefore, with the volume of transactions in forex, we can evaluate the validity of the dominant direction of the market.
2. Detecting a trend reversal
Trading volume analysis is a useful tool in detecting countertrends and when to reverse the dominant market trend. A divergence between price action and trading volume can indicate that the trend is weakening and is likely to reverse.
3. Confirm breakout
Trading volume plays a vital role in confirming breakout signals. The increase in volume with the occurrence of a breakout lends credibility to the move and indicates that the market is ready to accept a new direction.
4. Identify market sentiment
Trading volume is a powerful indicator of market sentiment. High volume during a strong price movement indicates broad participation and confidence among market participants; While low volume can be a sign of traders’ indecision.
How to read volume on forex charts
Reading volume on forex charts is simple. Most trading platforms in this market display volume as vertical bars on the price chart.
The height of the bars representing the volume corresponds to the total volume traded in the specified time period. Longer bars indicate more trading activity.
Methods of analyzing the volume of transactions in Forex
There are several methods and indicators that traders can use to analyze trading volume in Forex. Some of them are:
Equilibrium volume indicator
The Balanced Volume (OBV) indicator is a cumulative indicator that adds or subtracts volume for the day based on whether the closing price is higher or lower than the previous day. An increase in this indicator confirms an upward trend, while its decrease indicates a downward trend.
Volumetric price trend indicator
This VPT indicator combines price and volume to create a movement indicator and assigns positive or negative values to each day’s volume based on price movement.
Money flow index
The Chaikin Money Flow (CMF) indicator measures the amount of liquidity flowing into or out of a currency pair and combines price and volume data to assess buying and selling pressure. If this indicator is positive, it indicates buying pressure, while negative CMF indicates selling pressure.
Volume weighted average price
This index, which is called VWAP for short, determines the average price of a currency pair in a certain period of time and calculates its weight in terms of volume. Traders use VWAP to identify key support and resistance levels.
Challenges in analyzing the volume of transactions in forex
Although the analysis of trading volume in forex is very important, there are challenges in this work that we will examine.
Decentralized nature of forex
The decentralized structure of Forex makes it difficult to obtain accurate and standardized volume data. Different brokers may offer different data feeds and volume calculations.
Uncertainty in periods with low liquidity
In periods of low liquidity, volume analysis may not be very reliable. Low trading volume can lead to erratic price movements that may not necessarily reflect true market sentiment.
Not standard
Due to the lack of a standard method for volume reporting in Forex, volume analysis mainly requires a lot of resources and methods. Traders need to consider volume change data from a variety of sources.
How to calculate the volume of trading in forex
Calculating trading volume in forex is a bit challenging for the reasons we mentioned. However, a few methods that most traders use to estimate trading volume are as follows:
1. Tick size: Many forex trading platforms offer a metric called “tick volume,” which indicates the number of price changes (ticks) that occur in a given time period. Here, we do not directly measure the volume of traded currency pairs, we only have an indication of market activity.
2. Sales time and information: Some brokers provide time and sales data that records each trade along with its size and price.
3. Volume indicators: We talked about the use of indicators.
4. Future market volume: Sometimes traders can look at volume data from currency futures markets. Although there is no perfect correlation between them, there is some kind of coordination between the instant forex market and currency futures.
5. Tracked currencies in exchange-traded funds: Sometimes traders pay attention to the volume of ETFs that track certain currencies. For example, an ETF that tracks the euro may see increased volume during trading hours for the EUR/USD currency pair.
Practical tips for using volume in trading
- Validate price movements with corresponding changes in trading volume. If prices are rising but you see volume decreasing, this may indicate weakening momentum.
- Be wary of sudden increases in volume, as it may signal the start of a new trend or a reaction to news. Significant increases in volume often occur before major events in the forex market.
- Combine trading volume analysis with other analytical tools such as technical analysis. Combining volume analysis with indicators such as moving averages or support and resistance levels will increase the effectiveness of your analysis.
- Pay attention to time frames. Volume analysis can be different in different time frames. What appears as significant volume growth on the daily chart may be different from what you see on the hourly chart. So, consider that time frame that suits your trading strategy.
