All markets are powered by volume, and learning to read volume provides an extra layer of information and context for analyzing the markets and anticipating future moves. Although learning to use volume as an indicator takes time, the rewards are worth it. Volume analysis often shows that the price is about to reverse or make a new trend before any other signal. Volume can also confirm the significance of certain candlestick patterns, such as pin bars, and the potential direction of price breakouts.
This provides traders with an idea about the volume that has been traded for the currency pair at different price levels. It also helps in identifying extreme volume areas that depict key support and resistance price levels. The price volume imbalance strategy assesses the order flow and the current buying and selling prices to predict the short-term trend direction of the currency pair.
The trading volume is usually higher when there is a significant price fluctuation in the market. Volume is a key indicator of market activity and liquidity, which means that it is often presented alongside price information. Let us look at how volume plays a role in technical analysis and how to apply the knowledge in trading. However, examining price action alongside volume opens a new layer of actionable information. This in turn means the volume is also increasing, and the strong trend is going to continue in the near future. The traders making consistent money aren’t necessarily smarter or more disciplined than you.
XM: Advanced tools for volume analysis
To confirm this, traders can use the 20-period moving average trendline along with the OBV indicator. Volume trading in forex is all about trading currency pairs with high buying or selling pressure. It can measure a market trend’s strength and provide traders with ideal entry points. In our article, we will discuss the volume trading strategy in forex in depth. While volume can be a powerful tool for forex trading, it also comes with risks and challenges. The forex market is susceptible to manipulation by large institutional traders with access to high leverage and liquidity.
Let’s break down the most powerful tools in your analytical arsenal. By paying attention to divergence, traders can spot turning points in the market before they are evident in price action alone. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. If the volume is not there to confirm the breakout move, the quality of the signal formed by the chart pattern is weakened. If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend.
Volume Weighted Average Price (VWAP)
That’s panic selling or major institutions dumping positions—information you definitely want to know. However, traders must remain cautious of its limitations, especially regarding the interpretation of proxy measures. For example, if bitcoin jumps 20% in one trading day after being in a long downtrend. If the volume is high during the day relative to the average daily volume, it is a sign that it is reversing its trend. Technical analysis of an asset’s volume helps traders determine if certain situations are occurring, such as a true trend reversal.
- You stop being surprised by reversals because volume telegraphed them.
- Whatever the state of the waters, the price ultimately rests on the surface of the market volume.
- But when volume finally spiked as price reversed sharply lower, all those late buyers got trapped.
- In the forex market, true volume data is not as readily available as in stock markets.
- Understanding these challenges is vital for effective volume analysis.
Calculating Chaikin Money Flow
- Pick one or two volume indicators (I recommend OBV and volume bars) and master reading them alongside price.
- A doji at a key level on high volume shows intense battle between bulls and bears, making the next move potentially explosive.
- Most platforms show a moving average of volume (often 20-period) as a reference line.
- A bearish divergence occurs when the price makes new highs, but volume shows lower highs.
- VWAP calculates (Price × Volume) cumulative sum divided by cumulative volume.
- To confirm this, traders can use the 20-period moving average trendline along with the OBV indicator.
These traders can use their influence to create artificial volume spikes or gaps that can mislead other traders into entering or exiting trades based on false signals. For example, a large trader can buy or sell a large amount of currency quickly to create a sudden price movement that triggers stop-loss orders or margin calls from other traders. In forex Accumulation distribution indicator trading, volume can help identify market trends by showing whether there is enough momentum and participation behind it.
High-volume patterns get priority; low-volume patterns get ignored or require additional confirmation. That alone doesn’t guarantee a bounce—markets can stay oversold during strong downtrends. But if OBV starts trending higher while price remains oversold, now you’ve got divergence plus oversold readings. Low volume as price approaches resistance suggests weak buying interest—the move might stall without breaking through. But if volume expands as price nears resistance, that shows conviction.
Common volume indicators in Forex trading
When price finally breaks, it’s catching up to what volume already telegraphed. These typically happen on major news events or when a trend reaches its emotional peak. If NZD/USD has been falling for weeks and suddenly plunges on volume five times average—with everyone panicking out of positions—that often marks a selling climax.
Rising prices with increasing volume suggest a strong uptrend. I identify the bullish or bearish setup using price action with the trading volume as a confirming factor in all my examples. Chaikin Money Flow is an accumulation/distribution indicator that measures the volume of money flow when a currency pair is traded. The values oscillate between -100 to +100, generating buy or sell signals. The closer the currency pair’s closing value is to its high, the higher the accumulation and the closer it is to its low, it is a distribution.
When volume suddenly expands while price is away from boundaries, that often precedes a range breakout. VWAP becomes less useful in ranges, but OBV and A/D Line still provide valuable divergence signals. The platform provides actual volume data for futures (and forex futures), giving you superior information compared to tick volume. If you’re committed to volume-based trading strategies, NinjaTrader deserves consideration despite its complexity. AvaTrade excels in offering a wide range of educational materials, from beginner guides to advanced tutorials on Technical analysis, including how to use volume indicators. This broker also provides competitive trading conditions with a strong emphasis on risk management, which is essential when trading based on volume signals.
I’ve seen EUR/JPY grind higher for days with volume shrinking daily. Chart watchers thought “the trend is my friend” and kept buying. But when volume finally spiked as price reversed sharply lower, all those late buyers got trapped. The lack of volume was screaming “this rally is fake” to anyone listening. Don’t worry—you won’t need to calculate these manually (your trading platform handles it), but understanding the formulas helps you interpret signals correctly.
Volume should confirm chart patterns.
Ticks refer to a small fraction of price change and are valued as a fractional value. Ticks measure the minimum downward or upward movement in the currency pair prices, and the higher the tick, the higher the volume traded, and vice versa. Compare current volume to recent average volume for that pair and time of day.
In forex trading, “volume” refers to the total number of trades or contracts that are executed within a specific time period. OBV excels at spotting divergences between price and volume trends. VWAP provides intraday reference levels for institutional pricing. The A/D Line catches subtle shifts in market sentiment before price reflects them. Using multiple indicators together creates a comprehensive view of market dynamics that single indicators miss.
After you’re consistently profitable using basics, gradually add complexity. Let each addition prove its value before adding another layer. Volume spikes often occur at turning points—when the last buyers rush in at tops or the last sellers panic out at bottoms.
When VPT trends steadily in one direction, expect that price trend to continue. The most reliable volume climaxes combine massive volume with a wide-range bar (big distance between high and low) and price reversal. If that happens after an extended trend, start thinking about trading the opposite direction. When CMF turns positive after a downtrend, it often precedes price reversals.
