What is Volume Trading Strategy

Volume trading in forex is all about trading currency pairs with high buying or selling pressure. It can measure a market trend's strength and provide traders with ideal entry points. In our article, we will discuss the volume trading strategy in forex in depth.

 

What is volume in forex?

Volume in forex refers to the total number of currency pair units being traded in the market over a period of time. The higher the number of units being traded, the higher the currency pair volume and vice versa.

• A higher volume during an uptrend indicates a strong bullish trend and signals traders to place long orders.
• A higher volume during a downtrend indicates a strong bearish trend and signals traders to place short orders.
• A lower volume during an uptrend indicates a weak bullish trend continuing to a bearish reversal and signals traders to place short orders.
• A lower volume during a downtrend indicates a weak bearish trend continuing to a bullish reversal and signals traders to place long orders.

 

How to calculate volume in forex?

Volume in forex is measured by counting the total tick movements as currency pair prices move up and down in ticks. Ticks refer to a small fraction of price change and are valued as a fractional value. Ticks measure the minimum downward or upward movement in the currency pair prices, and the higher the tick, the higher the volume traded, and vice versa.

 

Factors to consider to trade with forex volume

 

Trend strength

When the currency pair prices are continuously rising, they depict a strong upward trend which also means that there is a strong buying interest for the currency pair. This, in turn, leads to an increased volume being traded from the buyer's side and signals market continuation. On the other hand, when the markets are choppy and are not following a particular trend, it depicts that the volume being traded is low, and the markets can potentially reverse.

 

Price reversals

When the market has continued in a particular trend for long and starts witnessing an opposite movement in the prices, wherein the volume is still high, it indicates a strong possibility for the market to reverse.

 

Bullish sign

A bullish sign indicates high buying pressure. This in turn means the volume is also increasing, and the strong trend is going to continue in the near future.

 

Breakouts vs. false breakouts

When there is a price breakout during a current trend, and the volume decreases, it indicates a higher probability of a false breakout and signals traders to hold onto their trades. The real breakout occurs when the currency pair prices break above or below their current prices with an increasing volume. This indicates traders to place orders along with the market and increasing volume.

 

Volume history

Traders can compare the volume being traded today to the volume that was traded for a currency pair over the last one to five years. The more recent the data being compared, the higher the chance of future volume prediction being correct. If the recent data shows a high volume, traders can place orders along with the current trend, and if the recent data shows a decreasing volume, it is better for the traders to trade against the trend.

 

Forex indicators used to identify forex volume

 

1. On-balance volume (OBV)

The OBV is a technical indicator measuring buying and selling pressure in the forex market by adding volume on up days and subtracting it on down days. Up days or up volume is when the currency pair prices close higher than the previous day and down volume is when the currency pair prices close lower than the previous day.

 

2. Accumulation/distribution (A/D)

A/D is a volume indicator that calculates the cumulative volume of a currency pair. It determines if the currency pair is being accumulated or distributed over time by measuring the currency pair's closing price and comparing it to its price bar's range.

 

3. Volume oscillator (VO)

VO measures currency pair volume by determining the relationship between a slow-moving and fast-moving average. The difference between these two is then represented as a histogram to evaluate if the currency pair is in a bull phase or a bear phase.

 

4. Chaikin Money Flow (CMF)

Chaikin Money Flow is an accumulation/distribution indicator that measures the volume of money flow when a currency pair is traded. The values oscillate between -100 to +100, generating buy or sell signals. The closer the currency pair's closing value is to its high, the higher the accumulation and the closer it is to its low, it is a distribution.

 

5. Tick volume

Tick volume represents the number of traders participating in the market. One tick represents one transaction, and the higher the tick, the higher the volume that traders can use to place orders, along with the current market trend. Tick indicators are able to measure the total number of transactions over a period of time and represent price change as bars on a graph appearing below the price charts. When the volume of the currency pair is more in the current period compared to the previous period, the bar appears green, and if it is less than in the previous period, it appears red.

Top forex volume trading strategies

 

1. OBV trendline strategy

The OBV trendline strategy makes use of price trendlines to determine if there is an increasing volume in the market or a decreasing volume. Whenever a currency pair price closes more than the previous day's close, it is considered an up volume, and when it closes below the previous day's close, it is considered a down volume. The total of all the up and down volumes forms the OBV line.

• When the currency pair is in an uptrend with a high volume, and the OBV line is rising too, it indicates a continued uptrend and signals traders to place more buy orders.
• When the currency pair is in a downtrend with a high volume and the OBV line is falling, it indicates a continued downtrend and signals traders to place more sell orders.

In case the currency pair volume stops increasing during the current trend, there is a chance of potential reversal. To confirm this, traders can use the 20-period moving average trendline along with the OBV indicator.

• If the OBV line falls as the price line increases, it indicates a bearish reversal and signals traders to place short orders.
• If the OBVB line rises as the price line falls, it indicates a bullish reversal and signals traders to place long orders.

 

2. OBV divergence strategy

The OBV divergence strategy focuses on market reversals that occur during periods of low volume. It indicates the direction in which a price breakout can occur by comparing the lows and highs of the OBV line compared with the price line.

• When the price line makes a lower low, but the OBV line makes a higher low, it indicates a bullish divergence and signals traders to place more long orders.
• When the price line makes a higher high, but the OBV line makes a lower high, it indicates a bearish divergence and signals traders to place short orders.

In this strategy, during a bearish divergence, a stop loss order can be placed above the recent swing low. As soon as the OBV line confirms the divergence, you can exit or continue in the trade accordingly. You take a short position when the price breaks below the existing trendline and hold onto it as long as the price trends lower around the support price level. On the other hand, when the OBV shows a bullish divergence, a stop-loss order can be placed below the recent price swing. As soon as the OBV line confirms the divergence, you can place a long position at the point where the price breaks above the existing trendline. You hold onto the position as long as the currency pair price is trending higher than the resistance level.

 

3. Percentage of volume trading strategy

The percentage of volume trading strategy is also called the participation rate strategy, which executes a forex order based on the percentage of the trade volume over a specific period of time. With this strategy, you can limit the total amount of contribution in the forex market compared to the overall average daily volume traded, which helps in minimising risks.

 

4. Price volume imbalance strategy

The price volume imbalance strategy assesses the order flow and the current buying and selling prices to predict the short-term trend direction of the currency pair. The order flow is generated when sellers and buyers on the forex platform place the orders they intend to trade and reflects the potential market direction. The balance or imbalance between the buy and sell orders being traded. The higher the balance, the higher the volume (and balance) being traded and vice versa. However, if the bid and ask orders do not match in number, there is a high imbalance, which indicates a short-term trend direction.

• When the imbalance is on the upside, meaning that sell orders are being filled more than buy orders, it indicates that there is a short-term bullish trend and indicates traders to go long.
• When the imbalance is on the downside, meaning that buy orders are being filled more than sell orders, it indicates that there is a short-term bearish trend and indicates traders to go short.

 

5. Volume by price strategy

Volume by price strategy plots the currency pair's volume on the vertical axis. This provides traders with an idea about the volume that has been traded for the currency pair at different price levels. It also helps in identifying extreme volume areas that depict key support and resistance price levels. This generates ideal buying and selling price points.

• When the currency pair has a high trading volume around the support level, it indicates a downtrend continuation and signals traders to place short orders.
• When the currency pair has a high trading volume around the resistance level, it indicates an uptrend continuation and signals traders to place long orders.

Once a volume by price chart is plotted, it illustrates high selling and buying pressures. When there is heavy resistance, the areas between the bar are shaded green, indicating a strong bullish trend, and when there is heavy support, the areas are shaded red, indicating a strong bearish trend.

Use your first volume trading strategy

The higher the volume, the safer it is to place an order. With volume trading strategies, you can analyse the existing trend's strength and trade according to the existing volume. Start trading with our global trading platform today and get access to several volume trading strategies and technical analysis tools. Sign up for a live trading account or try a demo account.