Forex trading volume: indicators and strategies

What is volume in forex trading?

Volume in forex is the number of lots traded in a currency pair within a certain time period. In other words, the amount of currency bought and sold. Volume on its own means very little, but in the context of price action and momentum, it can tell us whether trends are likely to continue or not.

Volume also relates to a market’s liquidity, that is, how easily currencies can be bought or sold. When there’s a higher volume of traders on the market, it’s more likely you’ll be able to open and close positions quickly and with a lower spread. The major FX pairs have the highest volumes, and so experience the highest liquidity.

A low-volume FX pair means it will have less liquidity, as there are fewer traders buying and selling the currency. This is usually the case for minor and exotic FX pairs.

Learn about forex trading

 

Forex daily trading volume

Forex daily trading volume is approximately $6.6 trillion according to the 2019 Triennial Central Bank survey of FX and OTC derivative markets. Of this, the US dollar, euro and yen experience the highest turnover of trades.

FX pairs tend to experience the most daily trade volume and liquidity when the relevant sessions for the pair overlap – if both locations are open at the same time. For example, GBP/USD will experience a higher trading volume when both the London and New York sessions are open.

Learn more about the best time to trade forex pairs

You’ll also see a lot of volume for pairs around key economic data releases such as non-farm payrolls, gross domestic product and the consumer price index, as well as news events. That’s because any indication a country’s economic situation is changing will cause traders to enter or exit positions, creating an influx of trading activity.

 

How to calculate volume in forex trading

Calculating volume in forex trading is complex as there’s no one source of data on currency market transactions. So, when you see volumes displayed on price charts, they’re typically only the transactions for that broker or exchange you’re using, rather than global trading volumes.

In other markets, such as stocks, volume is a bit more straightforward as there’s a central order book that transactions are recorded in. However, this does mean that volume is a lagging indicator, as it takes a while for the data to be collected – for example, stock exchanges usually record volume every 5 minutes.

Learn more about volume

 

How to use volume in forex trading

You’d use volume in forex trading to get an insight into what other traders – whether they’re individuals or institutions – are doing. Volume provides a key indication about which currency pairs are accumulating buy and sell orders.

Think of it this way: a trend can’t continue unless new traders enter the market and add momentum to it. Volume can’t tell us which direction the market will move in on its own, but it can give us clues as to whether a trend is strong or weak.

High volume doesn’t automatically translate to a higher price. An increase in volume just means that there’s more people on the market and that currencies are more likely to experience volatility because of a higher number of transactions.

 

Forex volume trading strategy

There are several ways to use volume to trade more effectively. Here are a few key forex strategies you can use:

• Trend trading
• Reversal trading
• Breakout trading

Trend trading volume strategy

Volume can help traders who like to go with the overarching direction of movement by confirming whether a trend has started before they jump in – rather than entering a position only to find out it was a false signal.

Traders want to see increasing volume in order to join the action, as this indicates there is strength behind the market movement. If the price is moving higher (or lower) without an increase in volume, this could be a warning of a potential lack of momentum and that a reversal could occur.

 

Reversal trading volume strategy

Some traders actively look for potential reversals, to get ahead of the change in direction and benefit from the shift in sentiment.

If after a prolonged upward or downward trend, the price starts to fluctuate in smaller price moves but still has a large volume, it could indicate that a reversal is imminent. This is because the changes in price show that neither the bulls nor the bears have complete control over the market.

So, if you spot a reversal candlestick pattern or indicator signal but it comes with low volume, it may not last long because there’s little momentum behind it. Whereas a reversal pattern that’s coupled with above average volume is likely to be a sustainable move.

 

Breakout trading volume strategy

When a market’s price reaches a support or resistance line, it could reverse, or it could breakout if the trend is strong enough. By taking a position as soon as the line is hit, traders can take advantage of the short-term euphoria that often comes when the market goes beyond these levels.

If the initial breakout sees a rise in volume, it indicates there’s strength in the new trend. But little change in volume or declining volume shows that the market wasn’t convinced that the breakout will last long, and there’s a higher probability the price will reverse.

As both reversal trading and breakout trading show increased activity around known price levels, in anticipation of a larger move, it’s important to use other types of indicators – not just volume-based ones – to confirm which is more likely.

 

Forex trading volume indicators

There are a number of ways volume is used as an indicator in forex trading, including:

• Tick volume
• Money flow index
• On-balance volume

 

Tick volume

Tick volume shows market activity and how many traders are currently participating in transactions. A single tick in forex represents a transaction – not its monetary value.

In futures markets, a tick can refer to the smallest possible change in the market price, which is located on the right side of the decimal. But in forex, we’d call that a pip instead – although it serves the same purpose. The term tick in forex is all about tick charts, so it’s important not to mix the two up.

Tick indicators measure the number of transactions that occur over a given period of time and present the changes as bars that appear below price charts. If the volume (number of ticks) is greater in this period than the last, the bar would appear green, and if the volume declines, then it would appear red.

Remember, there’s no guarantee that tick volume matches the global FX volume, as there’s no centralised exchange – you’re just seeing an estimate based on your broker’s volume. This is why not all platforms offer tick volume indicators.

 

Money flow index

The money flow index (MFI) uses historical price data and volume to show the rate at which money is invested into a currency and out of it. It helps to measure supply and demand, which is more difficult to assess on the decentralised forex market.

The MFI helps traders spot overbought and oversold market conditions, which provides insights into when a change in direction could occur. The money flow index oscillates on a scale between zero to 100 – with a reading above 80 indicating overbought conditions, and under 20 indicating the market is oversold.

To use the money flow index as a forex trading indicator, the theory goes that if the MFI hits 80 or 20, a reversal may occur.

 

On-balance volume

On-balance volume (OBV) is an indicator that measures buying and selling pressure. It adds the day’s volume to a cumulative total when the currency pairs price closes up, and subtracts the day’s volume from a cumulative total when the pair closes down.

OBV is displayed separately below the price chart and is used to confirm bullish and bearish trends on specific currency pairs. It works as follows:

• When price and on-balance volume are making higher highs and higher lows, it indicates that the trend is likely to continue moving upward
• When price and OBV are making lower lows and lower lows, it indicates the trend is likely to continue moving downward
• When price is trading in a range, but the OBV is rising, it’s likely that an upward breakout could occur
• When price is trading in a range, but the OBV is falling, it’s likely that a downward breakout will occur
• When price is making higher highs, but the OBV doesn’t, the uptrend is likely to reverse – this is called a negative divergence
• When price is making lower lows, but the OBV doesn’t, the downtrend is likely to reverse – this is called a positive divergence

How to trade volume in forex

To start trading volume in forex, it’s important to get to grips with the tools available to you. We’d always recommend using a market simulator first, to practise trading in a risk-free environment before you move on to live markets.

With City Index, you can open a demo account and trade FX with virtual funds before putting your own money at risk.

Open a demo account

If you’re confident trading FX volume on live markets, follow these steps to get started:

1. Open a City Index account, or log in if you’re already a customer
2. Choose from 80+ FX pairs in our award-winning platform
3. Select your position and size, and your stop and limit levels
4. Place the trade