Volume of trading in forex, represents the activity of traders (bulls and bears) on the market. It represents number of contracts changing hands in our chosen timeframe.
Volume is represented by indicator – forex volumes (vertical histogram of tick volume). Changes observed in volume, together with price action (Forex chart patterns), are giving us a clue on how are bulls and bears reacting to the price movement.
Volume also visualizes emotional involvement of forex traders in price level or candle formation Even though trading shouldn't be emotional, truth is emotions are playing big part in forex trading.
Keys to using volumes in forex markets
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In quiet markets, traders are lured into staying in the position for too long. Trend can continue in its direction for a long time on low volume, then end suddenly on extreme volume.
We can anticipate, that trend that continues on steady (but not low) volume is more likely to continue for longer period of time. Traders removed from the market are steadily replaced by new ones, that came to ride the trend.
Extreme volume on the market signalises that masses of loosing traders cannot tolerate pain from loss any more and they are finally liquidating their positions. Trend is becoming unstable.
Low volume on trend signalises that the involvement of traders in movement is declining and therefore trend is more likely to reverse. Therefore, a lot of forex traders commonly experience that once that they are forced to exit position with loss, market reverses in their favour. This often happens because masses of traders will feel pain from loss at same price level. As a professional trader, you should never allow your position to cause you pain influencing your decisions. You should also anticipate that market will hit common stop loss areas and place your stop loss above the level.
Volume usually stays low to medium in trading range, as traders do not feel too much pain while price doesn't move substantially. Therefore, fake outs are easily noticeable due to low volume. Fakeouts are accompanied by relatively low volume. Volume on true breakouts is typically high to extreme
Growing volume as the price moves signalises growing interest of traders in the price and the fact that washed out traders are replaced by new traders with new trend supporting capital. On the other hand, declining volume signalises declining interest of traders in price movement.
Growing (above average) volume on trend, declining volume on corrections – trend health, continuation. Declining volume on trend, growing volume on correction – trend becoming unstable, extreme volume may signalise its reversal. They are not interested in buying or selling at current price level.
Watch as the price approachess support/resistancee zone. Growing volumes as the price approaches makes breakout more likely. In other hand declining volumes signalise higher possibility of price bouncing off S/R price level.
Use moving averages applied on volumes chart to smooth out the histogram and be able to tell whether the average volume declines or rises. Use combination of slower and faster moving average. You can also use Bollinger bands.