After price itself, volume might be the second most important information we can get from the market. This extremely powerful tool is often neglected because of its simplicity. But it is a mistake. Volumes forex indicator can be used to improve profitability while decreasing risk of almost any forex trading strategy.
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Transaction (struggle for dominance) between buyers and sellers creates price movement on forex market.
Activity of bulls and bears – effort. reveals itself as volumes. Result of the efford reveals itself as price movement.
High forex volume also indicates high participation of traders at price level. This may be caused by market preparing for new substantial movement that involves important market players. On the other hand, low volumes is clear sign of uninterested and hesitance of big forex players in current instrument price.
In decentralised forex market, it is nearly impossible to get accurate volume readings. Volumes indicator therefore represents tick volume (number of ticks at price bar) and it can vary from broker to broker.
Using Volumes forex indicator
Trend health indicator. In healthy trend, volumes should generally rise as trend progresses, this signalises involvement of wider public, and growing interest of financial institutions. There is always necessary to compares volume to the price itself.
Moving Averages plotted over Volumes indicator window can help us to determine diminishing activity in trend continuation. In this picture EMA 14 (red) and 40 (black) were used.
Effort (activity - volumes) and result (price movement). While extreme candle on wide bullish candle signalise continuation, same extreme volume on flat candle may signalise preparation for substantial trend reversal.
Extreme volume and wide candle - continuation. Same volume with flat candle - reversal.
Breakout confirmation. Breakout on low volume, signalise low involvement of traders. You may just be one of the couple of traders that noticed the breakout. High volume on breakout candle, confirms new price direction in most of the cases. Comparing volume with candle formation, can be one of the most profitable tools of technical analysis.
Never trust a breakout on low volume. It usually is just s fakeout. Good news is you can also trade fakeout strategy.