What Is Volume of Trade?
Volume of trade refers to the total number of shares or contracts that are traded for a specific security. It can be measured for various types of securities, including stocks, bonds, options contracts, futures contracts, and commodities.
Understanding Volume of Trade
The volume of trade represents the total number of shares or contracts that are bought and sold for a particular security within a specified time period. It includes all the transactions between buyers and sellers. When a security is highly traded, its volume of trade is high. Conversely, when a security is less actively traded, its volume of trade is low.
Forex daily trading volume
The daily trading volume in the Forex market is estimated at around $6.6 trillion, as reported by the 2019 Triennial Central Bank survey of FX and OTC derivative markets. Among the major currencies, the US dollar, euro, and yen are the most actively traded.
In the Forex market, currency pairs tend to see the highest trade volume and liquidity when the trading sessions for those pairs overlap. For instance, the GBP/USD pair experiences increased trading activity when both the London and New York sessions are open simultaneously.
Additionally, significant spikes in trading volume occur around key economic data releases such as non-farm payrolls, gross domestic product (GDP), and the consumer price index (CPI), as well as during important news events. This is because any indication of a change in a country’s economic situation prompts traders to enter or exit positions, leading to a surge in trading activity.
How to calculate volume in forex trading
Determining trading volume in the Forex market can be intricate because there isn’t a single centralized source of data for currency market transactions. Therefore, when you encounter volume figures displayed on price charts, they generally represent the transactions specific to the broker or exchange you are using, rather than reflecting global trading volumes.
In contrast, other markets like stocks have a more straightforward approach to volume measurement because they utilize a central order book to record transactions. However, this structure means that volume data is somewhat delayed, as it takes some time to collect and compile the information. For instance, stock exchanges typically update volume data at intervals, often recording it every 5 minutes.
How to use volume in forex trading
In forex trading, the concept of volume serves as a valuable tool for gaining insights into the activities of other traders, whether they are individuals or institutions. Volume data offers essential indications regarding the accumulation of buy and sell orders for specific currency pairs.
Think of it like this: a trend cannot sustain itself unless new traders enter the market and contribute to its momentum. Volume, on its own, doesn’t predict the direction in which the market will move, but it provides valuable hints about the strength or weakness of a trend.
It’s important to note that high volume doesn’t automatically lead to higher prices. An increase in volume simply signifies that there are more participants in the market, making currencies more likely to experience volatility due to the increased number of transactions taking place.
Forex volume trading strategy
You can enhance your trading effectiveness in several ways by utilizing volume as a tool. Here are some essential forex strategies you can employ:
- Trend Trading
- Reversal Trading
- Breakout Trading
Trend trading volume strategy
Volume can be a valuable tool for traders who prefer to align themselves with the dominant market direction. It helps confirm the initiation of a trend before traders commit to a position, preventing them from entering a trade based on a false signal.
Traders typically seek rising volume to validate their participation, as it suggests strong momentum in the market’s movement. On the other hand, if prices are rising (or falling) without a corresponding increase in volume, it may serve as a warning sign of potential momentum deficiency and the possibility of a reversal.
Reversal trading volume strategy
Certain traders actively seek potential reversals in order to anticipate changes in direction and capitalize on shifts in market sentiment.
When, after an extended period of either upward or downward movement, the price begins to exhibit smaller price fluctuations while still maintaining substantial volume, it may suggest an impending reversal. This occurs because the price changes indicate that neither the bullish nor the bearish forces have complete dominance over the market.
Therefore, if you identify a reversal candlestick pattern or receive an indicator signal, but it is accompanied by low volume, it might not have a lasting impact due to the lack of momentum. Conversely, a reversal pattern that coincides with above-average volume is more likely to result in a sustained market movement.
Breakout trading volume strategy
When a market’s price reaches a support or resistance level, it can potentially either reverse its direction or break out if the prevailing trend is robust enough. Traders often seize the opportunity to take a position as soon as the price touches these levels, capitalizing on the short-term enthusiasm that frequently accompanies such market movements.
The key to interpreting these scenarios lies in the volume accompanying the initial breakout. If there is a surge in volume, it signals strength in the emerging trend. Conversely, if there is little change in volume or a decline in volume, it suggests that the market may not be fully convinced that the breakout will be sustained, raising the likelihood of a price reversal.
Both reversal trading and breakout trading involve increased activity around well-established price levels in anticipation of significant moves. To enhance the accuracy of predictions, traders should rely on a variety of indicators beyond just volume-based ones to confirm which direction is more likely to prevail.
Forex trading volume indicators
There are a number of ways volume is used as an indicator in forex trading, including:
- Tick volume
- Money flow index
- On-balance volume
Tick volume
Tick volume in forex provides insights into market activity by indicating how many traders are currently participating in transactions. In forex, a single tick represents a transaction, but it doesn’t convey its monetary value.
In contrast to futures markets, where a tick signifies the smallest possible price change, usually on the right side of the decimal point, in forex, this concept is referred to as a pip. However, both pips and ticks serve the same purpose in their respective markets. It’s essential to differentiate between the two.
Tick indicators in forex measure the number of transactions that occur during a specific time interval and display these changes as bars beneath price charts. If the volume, represented by the number of ticks, is greater in the current period compared to the previous one, the bar appears green. Conversely, if the volume decreases, the bar appears red.
It’s crucial to understand that tick volume doesn’t necessarily align with the global FX volume because the forex market lacks a centralized exchange. Instead, what you see is an estimate based on your broker’s trading volume. This discrepancy is why not all trading platforms offer tick volume indicators
Money flow index
The Money Flow Index (MFI) is a technical indicator that relies on historical price data and volume to gauge the rate at which money flows into and out of a particular currency. This indicator helps measure the dynamics of supply and demand, which can be challenging to assess in the decentralized forex market.
The MFI is particularly useful for identifying overbought and oversold market conditions, offering insights into potential reversal points. It operates on a scale ranging from zero to 100, with readings above 80 indicating overbought conditions and readings below 20 suggesting that the market is oversold.
When using the Money Flow Index as a forex trading indicator, traders often look for signals when the MFI reaches either 80 or 20. These levels are seen as potential indications that a reversal in market direction could be imminent.
On-balance volume
The On-Balance Volume (OBV) is an indicator that assesses buying and selling pressure in the market. It adds the volume of a trading day to an ongoing cumulative total when the closing price of a currency pair moves up. Conversely, it subtracts the volume of the day from the cumulative total when the pair’s closing price moves down.
The OBV is typically displayed below the price chart and serves as a tool to confirm bullish and bearish trends in specific currency pairs. Here’s how it functions:
- When both the price and on-balance volume are consistently making higher highs and higher lows, it indicates that the trend is likely to continue moving upward.
- Conversely, when both the price and OBV are consistently making lower highs and lower lows, it suggests that the trend is likely to continue moving downward.
- If the price is trading within a range, but the OBV is on the rise, there’s a likelihood of an upward breakout occurring.
- Conversely, if the price is trading within a range, but the OBV is declining, there’s a higher probability of a downward breakout happening.
- When the price is making higher highs, but the OBV fails to follow suit, it signals a potential reversal of the uptrend, referred to as a negative divergence.
- Similarly, when the price is making lower lows, but the OBV doesn’t, it indicates a possible reversal of the downtrend, known as a positive divergence
How to Trade Volume in Forex?
To start trading volume in forex, it’s important to get to grips with the tools available to you. We’d always recommend using a market simulator first, to practise trading in a risk-free environment before you move on to live markets.
To kickstart your forex trading journey on TradeLocker, it’s crucial to familiarize yourself with the available tools. We highly recommend starting with a market simulator to practice trading in a risk-free environment before venturing into live markets.
On TradeLocker’s platform, you have the option to open a demo account, allowing you to trade forex using virtual funds. This enables you to gain valuable experience without risking your own capital.