For the first time, the hypothesis about the relationship between the current price quotes and the level of supply and demand, which volume shows, was expressed by Charles Dow in his famous theory. In other words, how much money is at a particular price level, including pending orders. It is the increase in the money supply that will be the first signals of a close “price movement” under the influence of large forex players. Volume indicators are technical tools to evaluate a currency pairs bull and bear power. Most look specifically at buying vs. selling pressure to determine which side is in control of price action. Others attempt to identify emotions that are moving the security at a particular time.
What is the Volumes indicator?
As applied to financial markets, the term “volume” includes the total number of contracts for a trading asset (currency, stock, futures, option, derivatives) per unit time of a trading session or day. Two types of data are used:
- Exchange (real, “clean”): You can see both the number of transactions and their cash volume, opening/closing levels.
- Tick: Only the number of transactions per unit time.
The volumes indicator, which works with exchange data, enables a trader to assess the real interest of the market in specific levels and price zones. Still, as you will see later, you can also trade on a tick histogram.
I do not always attach much weight to exact numbers, especially on forex. The dynamics in activity are more valuable, and you need to watch how it relates to other tools and patterns. First of all, pay attention to:
- Histogram bar size: small, medium, enlarged. I usually analyze at least 10-15 past periods
- Transaction information: like, open interest in derivatives, such as currency futures. You can see not only the levels with the most contracts but also who is currently dominating the market i.e. market makers, small players, speculators or hedgers.
Thus, the volume indicator for MT4 looks for various “abnormal” situations that have a significant impact on the market: entry and exit of “smart” money, a change in the balance between buyers/sellers, determination of the exact breakdowns of levels.
How to use the Volumes indicator?
Volume indicators are usually histograms, where the columns indicate the growth or decline of market activity per unit time. Each bar, regardless of its size, represents one “tick”; the more they are per unit time, the more active the players are. But there is a significant drawback – the foreign exchange market, in contrast to the stock market, is decentralized, so the maximum that a small and medium player can see is the situation with a particular forex broker.
In reality, the influence on the market is fundamentally different, and you can often see how big forex players have already started a trend. The dynamics of tick volumes remain or change with a significant delay.
A logical question arises here that whether the volume indicator can benefit traders or not. Despite the fallacies, volumes indicator can give an edge to the traders.
When, with little volatility, sharp changes in the histogram up / down begin, this means that there is an accumulation of open interest, both deferred and “real.” Such volume dynamics are usually observed before the start of a new trend.
The volumes indicator for MT4, and therefore the number of ticks is growing, such an increase in activity always has a reason, and we can assume that the trend will wither continue or there will be a breakdown of a significant level and a range bound market. Naturally, additional confirmation is required, particularly when the market when flat.
Once again, tick volumes may not be the only tools utilised for analyzing the balance of power between buyers/sellers on forex. You can estimate only the total activity and nothing more with the volumes indicator and thus I would consider it imperative to add additional analysis.
Volumes indicator forex strategy
The following parameters should be considered whilst trading with volumes:
- Any trading asset
- Any time frame
- Ideally, the broker should have top tier liquidity providers (please see my ECN forex brokers article for more information).
Some of the most commonly used indicators are:
- Simple moving average (period 20)
In this case, the tick and real volumes of forex are considered the same, which in reality rarely occurs. We confirm the signals according to candlestick and technical patterns. Take a look at the chart below (buy setup):
The candle appears as long and bullish, closing significantly above the 20 SMA while the volume is significantly higher than previous bars. This indicates strong signal to buy.
Now take a look at the sell setup:
The price closes below the 20 SMA with the big bearish candle. The volume is significantly higher than the previous bars. This indicates a strong sell signal.
Volumes indicator conclusion
Any volume indicator is primarily useful in medium and long-term trading. I tend to find there can be many false signals appearing inside the intraday charts. I find it necessary to analyze any asset not only by the behavior of “the smart money” but also from “smart liquidity.” An increasing part of the trade flow begins to occupy open transactions using high-frequency trading (HFT). Thus, the real goals of market makers are often masked, especially when approaching significant price levels. But, despite false signals and other shortcomings, tick indicators on forex still allow you to see the nearest trends and can help to improve overall trading strategies.
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