Forex trading is heating up, with a volume increase of 28% over last year. If you’ve been waiting to get in on the action, now’s the time.
But how do you make sense of all that volume? How do you find the signals in the noise?
In this article, we’re going to tell you everything you need to know about using forex volume to your advantage. So read on and start making money.
How is Volume Measured in Forex?
Traditionally, the volume is the number of shares or contracts traded over a given period of time. Stock markets, such as the NYSE, can easily measure volume because all trades are moving through a central hub. But this isn’t true in forex trading.
So in order to measure volume, forex traders have to get creative. They use what’s called the tick volume, which is a measure of the number of times the price of the currency ticks up or down.
It seems like a strange substitute, but tick volume is highly correlated with actual volume. And for the purposes of this article, we’ll consider them identical.
Using Forex Volume to Read Trends
When looking at trends in forex markets, the price is, of course, your most important indicator. But volume gives you another layer of crucial information that will help you make sense of the trend.
For example, imagine the price of a currency pair is steadily rising with high volume. Then, the price and volume both start to fall. And after that, the price and volume both start to rise again.
This shows that there’s more enthusiasm in the direction of the price rise, which tells you that it’s a strong upward trend. So, the price will probably continue to rise. This is especially true if the second price-drop reverses before it reaches the starting price.
On the other hand, if the price slows its rise but the volume level stays the same, this indicates a coming reversal. This might be a good time to sell the currency pair.
Use Forex Volume to Identify a Breakout
A breakout happens when the price moves above or below a previous resistance line. Sometimes a price might creep beyond the resistance line and bounce right back. But other times, it will continue to rise or fall, without turning around. That’s a breakout.
If the volume increases after the price crosses the resistance line, you’re probably about to see a breakout. Position yourself accordingly, and get ready to make some money.
Add Volume to Your Arsenal
If you’re not using forex volume to inform your forex trading, then you’re missing out on a lot of valuable information. And if you want to beat the market, you need to use all the information you can.
Find a signal provider you trust, and start analyzing volume signals. Once you get the hang of it, grab some money and start trading for real.
If you want more great information on how to win big in the forex market, head to our blog.