Trading forex by volumes
Application of market deal volumes at Forex for forecasting of price behavior became popular only few years ago. The problem is that in the foreign exchange market no indicator will show your real traded volumes, much less open trades.
Forex simply does not have such volumes, because it is an over-the-counter market with no clearly defined trading venues, where there is not even the technical capability to collect such information. Traditional Forex volume indicators for MT4 usually show tick volume, i.e. the amount of transactions per unit time, and no one knows how much money is behind these transactions and whether they are in real life.
About 5-6 years ago it became possible to receive for a fee the information from major exchanges about volumes of futures - currency, commodities, indices - traded on them, which allows at least indirectly assess the influence of volumes on the market movement at Forex.
Of course, even now such data is not available to all, the information on each instrument is paid separately or it is suggested to open a real account, say, on CME (Chicago), perform on it a minimum volume of trading and then it is possible to receive in your terminal the flow of information about real volumes. Entry level to such an exchange platform starts at 5000 c.u., so not every beginning speculator can afford to trade on Forex volumes. Moreover, different software is required for processing such data.
Traders are offered either the most complete information on a particular exchange, or averaged information on all major trading floors. The volume data allows the size of the open and already recorded trades at a particular price level to be seen in a real stock ticker. But do not forget that the exchange trades are futures counterparts of forex instruments, and a special technique is required for the correct analysis of incoming signals.
Forex trading by volume provides insight into the activity of players in the market. If there is a large trading volume, then you can be sure that there is a big player on the market, and the market will react to his interest by a sharp break or a complete reversal of the trend.
If the volumes are small, there are no big operators and serious changes should not be expected, regardless of whether the market is in flat or a trend is present.
The volumes of trades traded also reflect the interest in certain price levels. Even a significant price movement on "thin" volume does not deserve as much attention as even a small price bump on high volume.
- Trading volume is always ahead of price because it shapes it, and divergence of volume and price indicates an imminent trend reversal.
Basic rules of forex volume trading
At the beginning of the trading session, orders accumulated by brokers overnight are executed, as well as volumes ordered by "willy-nilly" traders - importers/exporters, banks and others. This process is what ensures high volumes. The decline goes to the middle of the session, at the end of the trading session speculators form the closing prices of the market by entering into a large number of contracts.
The chart on the spot market has a shape opposite to the stock market, with the peak at 11 a.m. to 2 p.m. of the European time.
A decrease in volume signals a decrease in trading interest in this direction, which will give either a trend reversal or a flat.
Increasing volumes indicate growing interest from market participants in the current trend, which should lead, again, either to a trend reversal or strengthening of the existing trend.
If we observe the decrease of trading volumes with the sharp change of price, it means the capitulation of the players of one side of the market and waiting for the turning of the trend.
It is worthwhile to keep an eye on the volumes at lunchtime and at night, when the main trading floors (London, Frankfurt, Paris) are closed. During this time, the market is poorly predictable and small amounts lead to serious fluctuations. Big trading risks usually come at the opening of the American session - an aggressive break in the trend formed during the European session is possible, if the current state does not suit the big players.
Both price and volume dynamics are influenced by seasonal factor - expiry dates of futures and large options, end of financial and calendar year, major news releases.
The price level where there was high volume recently is particularly significant; it will later become a key support/resistance area.
Volume analysis on forex allows you to get a real picture of the balance of power between buyers and sellers and make the market closer and friendlier!