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What are Volume Indicators (& How to Use Them)

Volume in the forex market can be used to determine the upcoming market trends. Volume indicators are forex trading indicators that can identify if the volume for a particular currency pair is high or low, providing traders with market continuation and reversal signals. In our article, we dive deeper into volume indicators and how to trade them.

What are volume indicators?

Volume indicators are technical analysis parameters that determine a currency pair’s buying (demand) and selling (supply) pressures and in turn, help understand which side controls the price action. Volume is the total number of traded lots or changes in currency pair price in a specific time period.

  • When volume indicators indicate high currency pair volume, it signals a high buying pressure which tells traders that demand for the pair is high and they should long or enter a trade.
  • When volume indicators indicate low currency pair volume, it signals a high selling pressure which tells traders that supply for the pair is high, providing them with a price level to short or exit the trade.

When a currency pair is trading in the upward or downward direction with an increasing volume, it indicates a trend continuation in the same direction. However, when a market trend is supported by falling currency pair volumes, it indicates a market reversal due to a weak trend.

What does volume mean in the market?

Volume in the forex market refers to the total number of currency pairs being traded (bought and sold) in a specific time period. It is a key indicator for market liquidity. The higher volume of a currency pair being traded in the market, the higher the currency pair’s liquidity as there are enough buyers and sellers in the market for the pair.

Why is high volume important?

High volume is important while trading forex because it signals that more and more traders are willing to buy and sell the currency pair in the market, enhancing the asset’s liquidity. This makes it easier for the buyers to get hold of the currency pairs they want to trade and sellers to exit the currency pair trade without any hassle.

  • High volume and high liquidity lead to a tighter forex spread. The tighter the spread is, the lesser the difference between the ask and bid price of the currency pair, enabling your orders to be filled at the prices you want.
  • High volume also signals low volatility in the market, which means that the currency pair is being traded more frequently with less price fluctuation, making it a safer environment for beginner traders to start trading without the fear of losing money.

Why is low volume important?

Low volume in the market occurs when fewer buyers and sellers are willing to trade a given currency pair. It can identify market reversals as it signals that the current trend is weak.

  • Low volume during uptrend signals that buying pressure is low and bears (sellers) are catching up, leading to a downtrend reversal.
  • Low volume during a downtrend signals that selling pressure is low and bulls (buyers) are catching up, leading to an uptrend reversal.

Low volume also indicates low liquidity, which means that it is tough to trade the currency pair without causing a large change in its exchange rate. This, in turn, indicates high volatility in the market, providing expert traders with the opportunity to benefit from the rapid fluctuation of currency pair prices.

Top volume indicators in forex trading

1. On-Balance Volume Indicator (OBV)

On-Balance Volume is one of the most commonly used day trading volume indicators that measures the currency pair’s buying and selling pressure in the market. It is calculated by adding the day’s volume during high volume days into a cumulative total when the currency pair closes higher than earlier and subtracting the day’s down volume on low volume days when the currency pair closes lower than before. Whenever the currency pair prices close higher than the previous day’s closing price, the entire day’s volume is considered up-volume (increase in the currency pair’s trading volume). On the other hand, when the currency pair prices close lower than the previous day’s closing price, the entire day’s volume is considered down-volume (decrease in currency pair’s trading volume).

  • When the currency pair prices and OBV line touches higher highs and higher lows in the market, it indicates an uptrend continuation and signals traders to long a trade.
  • When the currency pair prices an OBV line touches lower lows and lower highs, it indicates a downtrend continuation and signals traders to short a trade.
  • When the currency pair prices touch higher highs, but the OBV indicator touches lower highs, it indicates a downtrend reversal and signals traders to short a trade.
  • When the currency pair prices touch lower lows, but the OBV indicator touches higher lows, it indicates an uptrend reversal and signals traders to long a trade.

OBV Formula OBV = Previous day’s OBV + Current day’s volume, if the closing price today is higher than the previous day’s OBV = Previous OBV + 0, if the closing price is the same as the previous day’s OBV = Previous OBV – Current day’s volume, if the closing price today is lower than the previous day’s

Graphic

2. Accumulation/ Distribution (A/D)

The Accumulation/ Distribution (A/D) is a volume indicator that can identify if the currency pair is being accumulated (bought) or distributed (sold) in the market. It measures how much money is being flown into the currency pair and outside of it.

  • When the currency pair price and the A/D line touch higher highs and higher lows, it indicates an uptrend continuation and signals traders to long the trade.
  • When the currency pair price and A/D line touch lower highs and lower lows, it indicates a downtrend continuation and signals traders to short the trade.
  • When the currency pair price touches higher highs, and the A/D line does not, it indicates a downtrend reversal and signals traders to short the trade.
  • When the currency pair price touches lower lows and the A/D line does not, it indicates an uptrend reversal and signals traders to long the trade.

A/D Formula A/D = Previous A/D + Current period’s money flow volume (MFV) MFV = Money flow multiplier * volume for the period Money flow multiplier = [(Close price – low price) – (high price – close price)]/ (high price – low price)

Graphic

3. Volume Relative Strength Index (RSI)

Volume Relative Strength Index (RSI) measures the change in a currency pair’s traded volume. It is similar to the regular Relative Strength Index indicator with one difference. In the Volume RSI, the up-volume and down-volume are considered instead of currency pair price changes. The Volume RSI oscillates between 0% to 100%, indicating market strength.

  • Whenever the Volume RSI indicator provides a reading above 50%, it indicates that the market is bullish and signals traders to long the trades.
  • Whenever the volume RSI indicator provides a reading below 50%, it indicates that the market is bearish and signals traders to short the trades.

Volume RSI Formula Volume RSI = 100 – [100 / (1 + VoRS)] Here, VoRS = Volume Relative Strength over the given period of time, calculated as a ratio between the average of up-volumes in the period and down volumes in the same period Hence, VoRS = Average of up volumes/average of down volumes

Graphic

4. Money Flow Index (MFI)

Money Flow Index (MFI) can identify oversold and overbought market conditions in a given time period. The index ranges from 0 to 100.

  • If the MFI is above 80, it indicates an overbought market, giving traders a bearish reversal signal. At this point, traders can short their trades to benefit from the falling markets.
  • If the MFI is below 20, it indicates an oversold market, giving traders a bullish reversal signal. At this point, traders can long their trades to benefit from the rising markets.

The MFI indicator and currency pair prices have a direct correlation, which means that if the MFI indicator line starts rising, the prices will start increasing as well and if the MFI line starts falling, prices will fall as well. MFI Formula MFI = 100 – [100 / (1+Money Flow Ratio)] Here, Money flow ratio = 14-period positive money flow / 14 period negative money flow Raw money flow = typical currency pair price * currency pair volume Typical price = (high price + low price + close price) / 3

Graphic

5. Chaikin Money Flow (CMF) Indicator

The Chaikin Money Flow (CMF) Indicator measures how much money flow volume (the currency pair’s typical price multiplied by volume) is being traded over a specified period of time for a currency pair. The typical price is the average of the high price, low price, and close price, and if the current typical price is more than the previous day’s typical price, it signals a positive money flow and if the current day’s typical price is less than yesterday’s typical price, it signals a negative money flow. CMF consists of a zero line that indicates the current trend’s strength. Whenever the value of CMF is more than or above the zero line, the current trend in the market is considered strong. But when the CMF value is less than or below the zero line, the current trend in the market is considered weak.

  • A positive CMF value along with a currency pair’s new high price in the market that breaks its resistance level confirms a bullish continuation and signals traders to long the trades.
  • A negative CMF value along with a currency pair’s new low price in the market that breaks its support level (where falling prices stop falling and start rising) confirms a bearish continuation and signals traders to short the trades.

CMF Formula CMF = 21-day average of the daily money flow of the currency pair / 21-day average of the volume of the currency pair Where, The volume of the money flow = money flow multiplier * volume for the specific period Where, Money flow multiplier = [(close price of the currency pair – low price of the currency pair) – (high price of the currency pair – the close price of the currency pair)] / (high price of the currency pair – low price of the currency pair)

Graphic

What is the best volume indicator for forex?

The best volume indicator in forex is the On-Balance Volume indicator since it gives close to the most accurate feedback after testing significant highs and lows in the market. It measures potential breakdowns and breakouts, providing reliable reversal signals in the market that help them place long and short orders accordingly.

What is the most common time frame for measuring volume?

Daily volume is the most popularly used and common time frame for measuring volume in forex. The average trading volume of the day is compared with the hourly trading volume by traders to place entry or exit orders accordingly. Traders who wish to trade in the long term compare daily trading volumes with overall monthly volumes to place their orders.

Start using volume indicators for successful trades

Volume trading strategy helps traders understand the market trend’s strength and place orders accordingly. Blueberry Markets is a forex trading platform in Australia that can help you kickstart your forex journey with seamless order execution, competitive spreads, access to advanced trading tools and more. Sign up for a live trading account or try a risk-free demo account.

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