Forex Volume Trading Strategy

Forex Volume Trading Strategy: Ultimate Guide

To thrive in the fast-changing and ever-evolving forex market, it’s crucial to have a strategy that keeps you ahead of the competition. The volume trading strategy is one such approach that can be used to gain an advantage. By analyzing trading volume and price fluctuations, this strategy acts like a secret weapon to better understand the market. It allows you to observe real-time buying and selling behavior and gain valuable insights into market trends! 

What does ‘Volume’ in Trading mean? 

Volume in trading refers to the total number of shares, contracts, or units of an asset that were traded during a specific time frame, commonly within a day or a trading session. It is an important gauge of market activity and liquidity that furnishes traders and investors with valuable information on the supply and demand of an asset. 

“Volume is the most important indicator for confirming a trend.” – Richard Wyckoff 

In every instance a trading transaction occurs, the volume of an asset is documented and presented as the count of shares or contracts that were traded. When an asset has a high volume, it can denote significant interest from traders, indicating that many are buying and selling it. Conversely, a low volume may imply insufficient interest, rendering an asset less liquid and likely more challenging to trade.  

What is Volume Trading? 

Volume trading is a strategy that involves examining the trading volume of financial markets to determine the level of market activity and sentiment. In context, a high trading volume typically indicates robust market participation and a high level of interest in a particular market or security.

Forex Breakout Trading Strategy: Ultimate Guide

“The higher the volume, the greater the potential for market direction.” – Larry Williams 

Traders and analysts employ volume data to evaluate market sentiment, monitor price trends, and make informed trading decisions. For instance, if an asset experiences high trading volume, it may indicate an impending significant move. Conversely, if the trading volume is low, it may suggest a sluggish market with minimal activity. 

Volume trading can be used in combination with other technical analysis tools like chart patterns, moving averages, and oscillators to make well-informed trading decisions. By analyzing the trading volume alongside other market indicators, traders can identify potential entry and exit points, allowing them to make accurate predictions about market movements.

What is the daily trading volume of Forex in 2023? 

According to the IMARC group, the forex market recorded a daily turnover of $7.5 trillion in April 2022, which was an increase from the $6.6 trillion daily turnover recorded in April 2019. Thus, forex daily trading volumes increased by approximately $0.9 trillion, or 14%. Looking ahead, the IMARC Group predicts the market will reach US$ 1,143.2 Billion by 2028, exhibiting a CAGR of 7%. 

How to Calculate Forex volume? 

Forex volume can be determined using technical indicators such as Volume-weighted average price, Tick volume, Money flow index, and On-Balance-Volume. Although the process is not overly complicated, the market’s decentralized nature can make it tedious. However, calculating forex volume is a critical aspect of forex trading that every trader should become familiar with. 

5 Best Ways To Calculate Forex Trading Volume:

Calculating forex trading volume can provide valuable insights into market activity and help traders make informed decisions. The formulas for all of these indicators use the previous volume and the current price changes to calculate volume.  

VWAP Indicator 

The Volume Weighted Average Price (VWAP) is an indicator that calculates the average price of a currency pair over the course of a day, taking into account the trading volume. It provides a snapshot of the currency pair’s value and price at any given time. Traders often use VWAP to identify their strengths and weaknesses. It is particularly useful for day traders who require data for a single day, as opposed to swing traders who may need to analyze longer-term trends. 

Klinger Oscillator 

The Klinger Oscillator can be utilized for computing the long-term money flow; however, it is sensitive to short-term fluctuations in the market. Traders can leverage this tool to identify favorable and unfavorable outcomes in both upward and downward movements by comparing the price movement of currency pairs. The Klinger Oscillator essentially showcases the results of this comparison. 

Tick Volume 

The tick volume method is commonly used by brokerages and trading platforms to identify market participants and activities in the forex market. A tick refers to a specific upward or downward change in the currency’s price, and while it is impossible to determine the exact number of contracts involved in each transaction, ticks are measured over a set period to calculate the net effect of price movements. 

Instead of focusing on individual transactions during price changes, the emphasis is on price movement. However, experts caution that tick volume can be misleading, while others consider it an effective method for determining actual volume, which can be incorporated into trading strategies to generate profits.  

The basis for this is the volume force, which is calculated by multiplying the trend, temp, and volume by 100. The 12-period moving average is also utilized, with the oscillator crossing on an upswing for a bullish trend and the opposite for a bearish trend. 

OBV Indicator  

Utilizing OBV (On-balance volume) is an effective method for detecting bullish and bearish trends in the market, as well as identifying price movements and breakout opportunities. OBV calculates the running open by subtracting the day’s volume from the total volume. 

Here’s how it works: 

  • Price and on-balance volume (OBV) consistently rising indicates an upward trend. 
  • Conversely, if both the price and OBV are consistently falling, the trend is likely to continue. 
  • An upward breakout is more likely if the OBV is trending upwards but the price is within a range. 
  • A downward breakout is likely if the price is moving within a range but the OBV is trending downwards. 
  • In a negative divergence, the price makes higher highs while the OBV does not, signaling a possible reversal. 
  • The price makes lower lows, but the OBV doesn’t, indicating a possible reversal in the downtrend. 

The OBV of a specific pair of currencies is displayed separately under the price chart. 

Money Flow Index  

The money flow indicator utilizes both volume and price data to determine whether a currency is oversold or overbought. This method is considered accurate by experts in the field. The formula used to calculate the money flow index is as follows: 

MFI= 100-100/ (1+Money Flow Ratio) 

The scale of the MFI ranges from zero to 100, with readings above 80 indicating overbought conditions and readings below 20 indicating oversold conditions. In forex trading, it is believed that if the MFI reaches 80 or 20, there is a possibility of a reversal.

Key Factors that Influence Forex Volume: 

Forex volume may be impacted by multiple variables and the following factors can contribute to its fluctuation: 

Weekly Market Outlook
  1. Economic data releases: Forex volume can be greatly influenced by the unveiling of economic indicators, such as GDP, inflation, and employment statistics. Traders frequently employ this data to inform their trading choices, which can result in heightened trading activity and volume. 
  1. Market volatility: A high level of volatility can cause traders to try and take advantage of price movements in the forex market, thus increasing trading activity and volume. 
  1. Political events: Forex volume can be influenced by various political occurrences such as elections, policy declarations, and geopolitical tensions. In response to such events, traders may modify their positions, which can lead to a surge in trading activity and volume. 
  1. Central bank policies: Interest rates or monetary policies of central banks can also have an impact on forex volume. These policies often lead to traders adjusting their positions, which can increase trade volume and activity. 
  1. Market sentiment: Forex volume can also be influenced by traders’ overall moods. A positive sentiment can result in an increase in trading activity and volume, while a negative sentiment can result in a decrease in trading activity and volume. 
  1. Trading sessions: Although the forex market operates 24 hours a day, trading volume varies from one trading session to another. Asian trading sessions, for instance, tend to have lower volumes than European and North American sessions. 

Trading decisions must be based on these factors if traders are to make informed decisions.

How does Volume work as a Trading Indicator? 

Volume is a crucial trading indicator that helps traders to understand the market’s strength and is also used to confirm the price trend or signal a potential trend reversal. Here are some ways in which volume works as a forex trading indicator: 

1. Currency Accumulation and Distribution: 

When buyers dominate the market, it leads to accumulation. Thus, during a downtrend, an increase in volume indicates a potential reversal as buyers take control. A reversal is confirmed if the volume increases while the closing price exceeds the previous price. 

When sellers dominate the market, it leads to distribution. During an uptrend, an increase in volume indicates more sellers entering the market, and a reversal could happen. If the volume persists and the closing price drops below the previous price, the reversal is confirmed. 

The formula for accumulation and distribution is: 

AD= ((Close price-open price)/ (High Price-Low Price)) *Volume 

Indicators that fall indicate currency distribution, whereas indicators that rise indicate currency accumulation. 

2. Confirmation of the trend: 

High trading volume often confirms the trend in the stock price movement. When there is an uptrend, an increase in volume is usually observed. Similarly, when the market is trending downwards, the volume also increases. However, if the volume is low and the price trend is moving upwards or downwards, it might indicate a weak trend. 

3. Trend Reversal: 

Monitoring trading volume can be a useful tool for identifying potential trend reversals in assets that are experiencing upward or downward trends. If the trading volume decreases while the price trend remains in place, this could suggest a loss of market momentum and a possible end to the current trend. If trading volume continues to decline, there is a greater likelihood that a trend reversal may occur. Therefore, traders should pay close attention to changes in trading volume and adjust their trading strategies accordingly in order to identify these situations. 

4. Price Breakout: 

The volume of trading activity is an additional signal that can assist traders in identifying possible breakouts in asset prices. If trading volumes exceed the usual level by a significant amount, it could suggest a change in market sentiment, and the currency price may potentially surge if the trading volume significantly exceeds the average. 

5. Market Sentiment: 

A significant amount of the market’s volume can also be used as a guide for assessing market sentiment. There is a possibility that if there is a high trading volume in the market, it may be a sign that there are a lot of buyers or sellers in the market, and that there is a high level of activity.

Advantages of Using Volume Trading Strategies: 

Using volume trading strategies can offer several advantages to forex traders. Some of these advantages include: 

  • High trading volumes are strong indicators of market interest at a particular price level.  
  • Volumes can signal both upward and downward price moves and have been a tried-and-tested indicator for years.  
  • Extreme volume moments, accompanied by significant price changes, can attract passive investors and bring greater momentum to a trend.  
  • Trading with trends and getting in at the start can maximize potential gains.  
  • Volume is a leading indicator that can help traders avoid false signals from lagging indicators.  
  • Algorithmic trend-following strategies increasingly use volume as a guide, making it sensible for smaller traders to do the same. 
  • Monitoring volume can help traders navigate the year and develop new skills to explain market moves.  
  • Tick volume data is often free from good brokers.  
  • Successful trading involves making the right call on a breakout, trading with market momentum, and using volume to spot the end of a trend and consider exiting a position. 

There are also some Disadvantages you should be aware of: 

Volume indicators can indicate activity, but they cannot guarantee whether a trend will reverse or if the price is passing through a significant support/resistance level. A sudden surge in volume can indicate market panic, but trading high volatility markets can be risky as emotions can cloud judgment. 

How to Start Trading Forex Volume? 

Trading forex volume can be a complex task and requires a good understanding of the forex market and its indicators. Here are the basic steps for implementing a forex volume trading strategy: 

  1. Analyze the Trading Volume: Obtain information about trading volumes in the forex market using technical analysis tools. This can be done by looking at volume indicators such as On-Balance-Volume (OBV), Volume Weighted Average Price (VWAP), Money Flow Index (MFI), and Accumulation/Distribution Line (Accum./Dist.). 
  1. Watch for Volume Spikes: It is important to watch for unexpected increases in trading volume, which can signal a change in sentiment. For instance, a large increase in volume could indicate that more buyers are entering the market on an uptrend. 
  1. Confirm using other Indicators: When the volume provides a signal, you can use other technical indicators, such as moving averages, to verify it. As a result, trading strategies become more accurate, and false signals are reduced. 
  1. Make Trading Decisions: Make trading decisions based on the information gathered from analyzing trading volume. For instance, based on the volume spike and confirmation from other indicators, a trader may decide to buy or sell a currency pair. 
  1. Take steps to Manage Risk: Include risk management techniques such as stop-loss orders in your trading strategy. 

Forex volume data is not as easily accessible as it is for stocks, making volume analysis less precise. However, combining it with other technical analysis methods can still prove valuable and should not be relied on solely for trading decisions. With an ECN account, your trades are executed instantaneously, which means you can take advantage of market opportunities as they arise! 

Forex Volume Trading Strategy: FAQ

What is the best volume indicator for forex? 

The 4 best volume indicators are On-Balance-Volume (OBV), Money Flow Index (MFI), Volume-Weighted Average Price (VWAP), and Accumulation/Distribution Line (Accum./Dist.). OBV measures up and down days based on volume, MFI includes both price and volume data, VWAP weighs average price by volume, and Accum/Dist measures buying and selling pressure. 

How to Confirm Volume Strength? 

One way to verify the strength of the volume is by employing a technical analysis tool like the Volume Indicator or On-Balance-Volume (OBV). Traders can use these tools to gauge the market’s buying or selling pressure by measuring the volume of specific assets. Additionally, by comparing the current volume to past volumes, traders can determine whether the current volume is above or below average. 

Is volume useful in forex? 

In forex, traders can use volume indicators to track the number of ticks or changes in price over a given period, or they can use other technical indicators such as moving averages, Bollinger Bands, or the Relative Strength Index (RSI) to analyze market movements and identify potential trading opportunities. 

How do you use volumes in forex trading? 

In forex trading, volume can be used to confirm price movements, identify trends and reversals, and to determine the strength of a trend. Volatility indicators can be used to track price changes over time, but since forex trading is decentralized, volume should be used in conjunction with other technical and fundamental indicators. 

What is the Best Volume Indicator? 

Chaikin Money Flow (CMF) is the best volume indicator for a volume trading strategy in the Forex market. Its ability to measure institutional accumulation-distribution makes Chaikin Money Flow an ideal volume indicator. When a rally is underway, Chaikin volume indicator should usually be above zero. Conversely, the Chaikin volume indicator should be lower on selloffs. 

free online forex course