Volume in forex trading is how much currency (e.g., Euros, US Dollars, Japanese Yen, etc.) is traded in a specific time interval.
If a stock is experiencing a high volume, that means there are a lot of shares changing hands.
In this post, we’ll show you how volume is calculated and some tips on using volume to find trading opportunities.
What is Forex Volume in trading?
Forex Volume is simply a way to describe the exchange of assets from one trader to another. For example, anytime a trader executes a trade, and the asset is sold by him to another who buys the asset, experts refer to such a phenomenon as an increase in the volume traded for that particular asset. The main reason why the concept is so hard to grasp even for some long-time traders is because there isn’t a centralized exchange that provides an accurate calculation of all assets traded online on a country by country basis, asset basis, or even on a global scale.
Even if experts decide to do it by automation, it will be almost impossible to pull off because there are thousands of assets traded online every day across hundreds of trading platforms. Furthermore, there is no centralized exchange for over-the-counter assets. This is why volume is merely used as a loose term and quantified based on the trading activity of an individual trader.
Volume is influenced by institutional traders
We know that most traders are small-scale retail traders, and on any given day, there are hundreds of thousands of retail traders active in the market trading one asset or the other. However, these are not the group of traders that influence the volume traded for a particular asset. Instead, the trader that influences the market are the institutional traders who trade these assets in large volumes. For instance, while 10,000 traders may trade 1 million units (volume) of a particular derivative, a single institutional trader may trade 10 million units of that particular derivative.
So in a situation where there are 20 million units of derivatives in the market, the volume traded by this single institutional trader may influence the price movement of the market more than the other 10,000 traders who hold only 5% of the entire value.
Sources of Volume data
Most of the volume data analysts rely on to make projections about a particular asset is derived from the data supplier by brokers who majorly service retail traders. So, for instance, the volume of EUR/USD traded on a particular day can be culled from the data supplier by two or more brokers and used as a rough estimate to make projections.
However, for the average trader who does not have the capacity or resources to analyze such a large body of data they rely on the volume of given asset that is traded on the platform that they use.
How to trade with Volume?
As a retail trader, there are ways that volume can still work for you if you go to the right source. The key is to follow the trend, and doing so is very easy.
Large trading platforms
If you use a large trading platform, you will be able to see data showing the volume of assets traded for a particular period. Brokers like Forex.com, IG, Avatrader, and even FXTM have some of the biggest trading platforms in the world. So if you see big numbers for a particular asset or currency pair, just know that significant volumes of the asset are changing hands in real-time.
Trend
Another way to tell if an asset is being traded at significant volumes is to watch the trend. Even if you don’t trade on a mega platform, you can still evaluate volume by focusing on the price movement of a currency pair or a particular market.
Tick Volume and liquidity
Another way to trade with Volume is to analyze the tick volume at a particular period. In trading, a tick represents price changes in any given direction (rise or fall). If there is a spike in the price, this is an indication that several traders have closed or opened trades for that particular asset. Now, the good thing about a high tick volume is that this shows that there are more traders in the market looking to buy or sell the given asset at that point in time. This will, in return, lead to price changes which provide opportunities for profiteering
Also, note that when there are many traders on the buyer and seller side for a given asset, the price fluidity this creates is known as liquidity. Thus, a liquid asset is a very good signal to show that an asset is indeed ripe for volume trading.
New Releases
Another signal volume traders wait for is news releases or data publications by media companies, corporations, government institutions, and central banks. This is because many traders respond to these publications as soon as they are released. The forex market, for example, is filled with examples of consolidating markets springing to life in anticipation of a publication or as soon as a publication is released.
For new traders, this may seem strange but experienced traders have come to expect it. As soon as the report is made public, there will be an uptick in the volume of the asset mentioned in the report. So, on a trading platform, it is common to find the candlestick for that asset showing higher highs or lower lows depending on the nature of the news and how participants react to it.
Conclusion
Volume in Forex trading refers to the quantity of an asset bought and sold at a particular period. Many expert traders use volume to evaluate the liquidity ratio of an asset to know if trading with such an asset will be profitable. However, it has its risks. For example, if there is an uptick in volume, it may lead to price volatility which may expose your investment to risks. This is why it is advisable to use volume in conjunction with other indicators or)and strategy rather than using it as an independent source of data to make trading decisions.