It’s easy to talk about forex volume, but what is it?
Volume is the number of trades that occur per unit of time. Forex volume is the total value of the trades that occur each day.
So, if you see many trades occur per unit of time, you’ve probably observed a lot of volume in the market. And, if you see a lot of trades, you can assume that there’s a lot of volume in the market.
What is Forex Trading?
Forex trading is when a trader buys a currency and sells a different one, and the exchange range fluctuates according to the demand and supply. The trade for currencies takes place in the foreign exchange market that is open from Monday to Friday.
The Foreign exchange market is open 24 hours a day. All currencies are traded over the counter (OTC), which means there are no physical exchanges, and a worldwide network of financial institutions and banks oversee the operations. As a result, the vast majority of trading in the market is between institutional traders.
Total Amount of Volume in the Forex Market?
The Foreign Exchange market is the most active globally, and the total volume of the market daily is $ 5 million. This amount exceeds global trade volume by 25 times.
How to Calculate Volume in the Forex Market?
The volume in the Forex market is considered the total number of shares that are traded (sold or bought) during a day or a specific period. Thus, the volume is a measure of the total turnover of shares. Each tick in the chart is representative of trade and is counted in the total volume.
For example, if XYZ bought 500 shares, then sold them, rebought them, and sold them again, resulting in four ticks on the chart, the total registered volume will be 2000.
Definition of Volume
In the Forex market, the number of lots traded in a currency pairing or the market during a specific period is called ‘Volume.’ The volume is a measure of the trading activity in the Forex market. In simple words, it is the amount of currency that changes hands between buyers and sellers.
How to Use Volume to your Advantage?
The more volume in the Forex market during a specific period, the better it is for buyers and sellers. If the market has a low number of buyers and sellers, the price will likely be unfavorable for trading. The volume moves the market, and we can see an increase in the volume when markets overlap.
The New York-London and London-Tokyo markets overlap, and this increases the volume. On most occasions, volume is overlooked in favor of price-related action, but the combo of price and volume is unbeatable.
Volume Precedes Price Action
When the market is in a ranging condition, the total volume of trades is low, as few people are trading, so there is no price movement. But when the volume rises, it is an indication that more people are trading and are either selling or buying currency pairings. Some traders wait for the volume to rise before investing.
Volume Cannot Differentiate Between Bears and Bulls.
Unfortunately, when you are trading in the Forex market, you cannot rely solely on volume; you also need to consider other factors. For example, most traders consider volume a trend influencer; this is incorrect as volume cannot predict a trend. All volume shows is the amount of buying and selling taking place in the market.
How Accurate is Trading Volume?
Forex is a decentralized market so traders can buy and sell, and they are not answerable to authority. Unfortunately, there is no centralized report available on volumes, and brokers have the most information regarding volumes. However, brokers are not reliable, as they hardly ever give the correct volume figures.
This is a problem, and it means that the volume you are analyzing might not be accurate. It may be a reflection of how traders are trading through a particular broker. To avoid this problem, you need to develop a counter-strategy, which is to trade with brokers who have a lot of traders under them.
The theory behind this counter strategy is that these brokers will give you a much clearer picture of the volume in the market. Another issue that often comes up when you analyze volume on charting software is that it shows the tick volume.
The major difference between real and tick volume is incredibly high, sometimes close to 90 %. The best way to use volume is alongside the price.
Three Useful Volume Indicators
There are many ways of measuring the trading volume; you can also incorporate these three indicators into your trading strategy:
Use the VWAP Indicator
The VMAP (Volume-Weighted Average Price) gives traders the average price for a currency pairing throughout the day. There are two main reasons for using VWAP:
- It shows the underlying trend
- It shows the value of security
Traders can use this indicator to buy or sell currency pairings in the Forex market, which is similar to moving averages. However, there is a difference between moving averages and VWAP; VWAP takes into consideration volume.
VWAP is more useful for day traders rather than swing traders, as its main emphasis is on volume throughout the day. However, those traders that use the VWAP can also apply the ‘End of day play’ strategy. This strategy comes into play when there is a significant gap between the trading price and VWAP.
A trader that is dependent on volume will usually wait for the end of the day before investing. However, some traders might wait all night long and invest the next day.
Use the OBV Indicator
OBV (On-Balance Volume) is an indicator that is useful in the characteristics of the volume. This indicator will let the trader know whether the volume is bearish or bullish. Despite looking similar to the current price on the charts, OBV is more skewed and contains downtrends and uptrends.
However, volume traders need to be careful as OBV sometimes gives away false signals.
Klinger Oscillator
The Klinger Oscillator is another helpful indicator and takes into consideration the trade volume. This indicator measures the long-term flow of money in the market and is sensitive to short-term changes. By using the Klinger Oscillator, traders can identify if a trend is positive or negative.
The Klinger Oscillator usually comes with a thirteen-month moving average. When the thirteen-period moving average crosses the Klinger Oscillator, the signal is considered bullish. If the opposite happens, the signal is considered bearish.
Forex Trading Frequently Asked Questions (FAQ)
- Who owns Forex, and where is it located?
Forex does not have a particular owner; it is an interbank market, which means transactions occur between a seller and a buyer. Therefore, as long as the current banking system exists, Forex will exist as a specific government or country that does not run it.
- Working Hours of Forex?
Forex opens at 22:00 GMT on Sunday (Australian trading session opens) and closes on Friday 22:00 GMT (US trading session closes)
- How Much Money is Needed to Start Forex?
Some traders start trading with just a dollar; however, the starting amount varies from 100 to 100,000 dollars.
- Best Strategy for Forex?
No one strategy is better than the other one; traders must develop new strategies all the time. Some Forex strategies are only beneficial in the short term.
- Can I Lose more than What I Invest in Forex?
Not really; the broker will not let the trader face huge losses and will not allow the loss to be greater than the amount in the trading account.
Conclusion
As we know, trading in the Forex market is not easy, and you cannot rely on one factor; you need to analyze each factor and then come up with a suitable strategy. While volume trading has its benefits, it also has flaws and can be inconsistent and inaccurate. Analyze all the details that we have discussed and make your own decision.