Volume is an essential component of Forex analysis and provides valuable insights into market dynamics and price movements. While volume data is readily available in the stock and futures markets, it is decentralized and not as easily accessible in the Forex market. Nevertheless, when volume information is obtainable, it can enhance the effectiveness of Forex analysis.
Volume represents the total number of shares or contracts traded during a specific time period. In the Forex market, where there is no centralized exchange, volume refers to the total number of transactions or price ticks within a given period (tick volume). Such volume is less significant, but it still helps traders assess the strength and significance of price movements and indicates market participation and liquidity.
Here are some key reasons why volume is important in Forex analysis:
- Market Interest
Volume acts as a confirmation tool for price movements. A price move accompanied by high trading volume suggests strong market interest. Low volume typically indicates a lack of interest from market participants.
- Identification of Breakouts/Breakdowns and Reversals
Volume can help identify breakouts from key levels or chart patterns. If large volume forms right at the support/resistance level, it will usually lead to a breakdown/breakout and a continuation of the move. If large volume forms behind the level, it typically indicates a liquidity grab and a subsequent reversal of the price movement.
- Market Depth and Liquidity
The volume provides insights into the market depth and liquidity. Higher trading volume generally proposes a more liquid market with ample buying and selling opportunities. In such a market, traders can easily enter and exit positions, minimizing the risk of slippage and ensuring efficient execution of trades.
- Divergence Analysis
By comparing volume trends with price trends, traders can identify potential divergences that might signal a forthcoming reversal. For example, if prices are rising while volume is declining, it could indicate weakening market participation and potential exhaustion of the trend.
- Risk Assessment
Volume analysis can assist in assessing market risk. Sudden spikes in volume during price declines or advances may indicate increased volatility, heightened uncertainty, or the presence of significant news events. Traders can use volume information to adjust their risk management strategies accordingly.
Due to the decentralized nature of the Forex market, volume data may be less accurate and comprehensive than in centralized markets like stocks and futures. That is why, if you want to get the most out of forex volume analysis, we recommend using CME futures volume for currencies and indices through special MQL cluster delta indicators.