Volume in Forex Trading

[RichardCox 10]

Volume is often overlooked by Forex traders because there is no central exchange in the way that there is in stock markets but when we look at the volume that is present behind certain price moves, it can help us to determine the validity of that move. By extension, this can also help us to determine the likelihood of a continuation or reversal.

 

When a currency pair shows an impulsive price move in either direction, one of the best indicators of whether or not the momentum will continue can be seen in the volume levels as it occurs. Higher volumes help to support the validity of the move, while moves that are generated by lower market volumes are more likely to encounter unpredictable reversals or generally choppy trading conditions. Keeping an awareness of volume conditions will allow traders to separate important market moves from the “head fakes” as it helps to give a better sense of what the majority of the market is actually thinking.

 

Measuring Forex Volumes

 

Volume measurements can make a large difference when assessing price action, especially for the closing prices in a period. Closing prices can be described as being a more accurate reading of market sentiment when volumes are high, as a greater consensus is present and this gives traders a better sense of a currency's real value. But since Forex is not a centralized market, how can volumes be measured accurately?

 

Volume measurements in Equity markets are conducted in a very straightforward manner, as each share is assigned 1 volume unit. So, buying or selling 10 stock shares in an exchange is equal to generating 10 units in volume. But since the Forex market is decentralized there is no single body to conduct these measurements on a daily basis. Instead, Forex volumes are based on the number of price changes (tick changes) that are seen over a given time period. Price changes cannot occur without a certain number of trading contracts changing hands, so individual tick changes become the primary indication of market participation for each period.

 

Volume Readings as Trend Indicators

 

New traders should be sure to not confuse the fact that Volume readings are not to be viewed as primary trend evidence, but rather a secondary or “confirmation” evidence. When trend signals begin to build (higher highs/lows or lower lows/highs) there should also be a build in volume activity. Without this, the trend should be viewed with skepticism, as this reduced validity suggests there is a greater chance reversals at a later stage.

 

In addition to this, significant changes in volume can be viewed as a primary indication that an equally significant change in price is about to occur. What is not present at this stage, however, is the direction of the move but if what is seen is an increase in volume, traders will be getting a signal that suggests sustainable momentum is building. Major declines in volume can also lead to significant price changes, as it takes fewer participants to create large changes in price. These price changes, though, should be viewed as less sustainable.

 

Conclusion

 

Volume measurements in the Forex markets is an often overlooked aspect of trading and this comes in part because because stocks and currencies are not traded in the same fashion. While it can be argued that currency volumes are much more difficult to calculate, it is not impossible and traders that neglect this aspect of market activity will likely miss some early signals that could have indicated the beginning or end of a trend. Volumes will not give traders an indication of price direction itself but it can give some valuable clues with respect to the validity of the price momentum that is in place during a given time period.