Volume in the Forex Markets: How Can It Be Used?

Filed under: Learn Forex Trading |

One of the things that I have not talked about much is the volume indicator in the forex markets. To begin with, although we call it a ‘volume indicator’, it is not an indicator in the sense of all of the other indicators (like MACD, RSI, or stochastic). This is because all of the other indicators are derived from price action data, whereas volume is independent from price action, and represents the total amount of trades made in a particular market. But what exactly, does volume tell us?

 

Well, what volume does is to tell us about the level of interest in a particular market. Thus, if volume is high, then there are a lot of traders wanting to participate in the market, and if volume is low, then a lot of traders want to watch from the sidelines – so to speak. This is useful because low volume tells us that there is uncertainty in the market, and high volume during a trend is indicative that the trend is likely to continue. When volume dips, then it can be an indication that uncertainty is taking over, and that the trend might be coming to its climax.

 

Figure 1.

Figure 1.

If you take a look at Figure 1, you will see an example of a waning interest in the market. This pair had been moving up in a bull trend, but then volume started to drop. Although price continued to move up, volume was getting notably lower, and this resulted in price consolidating, and then dropping lower with a large bear candle. Although I wouldn’t use volume to trade from directly, it can be useful when managing trades to note the interest in the market, and whether uncertainty is creeping in. In this respect, volume can be another string on your bow, and a useful addition to your trading arsenal.

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