What is Volume in Forex Markets? is it Useful?

What is Forex Volume?

Forex volume is probably one of the most misunderstood, yet most important tools traders have at their disposal.

In other financial markets such as stocks and futures, traders almost exclusively use volume to make trading decisions, however, in forex markets, traders are often quick to overlook what can be an incredibly useful tool.

So what is forex volume? Effectively every time a trade is executed the volume of the quantity traded can be calculated.

Calculating forex volume is made a little harder because there is no centralized exchange. Forex is a decentralized OTC product. For that reason, volume that takes place is based only on the individual pair on a given exchange at that point in time. Which is effectively just broker data.

That’s the main reason many traders are quick to discount the value of forex volume in their analysis.

There is also the other issue that prices move based on big institutional order flow. Much of the volume data that is available is from brokers who specialize in retail clients and the forex volume isn’t indicative of the price action we have seen.

So that can cause issues when looking at forex volume and trying to use it as some sort of indicator. However, there are ways we can still use forex volume and make it work for us.

How To Use Forex Volume?

Even though we don’t have a centralized exchange when trading forex, there are still some large exchanges that do significant volume on a daily basis.

So the way to think of volume data is that it is a snapshot of what the larger institutional players might be doing.

Regardless of the total volume, traders accumulate positions and buy and sell in similar areas.

The higher timeframe institutional money will still be entering the market and we won’t be able to see all that volume on a chart, but the general trend or idea will be there and it will be enough for us to make some trading decisions.

GBP/USD (FXCM) – 30min.

As you can see in the chart above, which is the GBP/USD on FXCM, the simple volume indicator, paints a pretty accurate picture.

During the main European market hours, volume spikes. Then during the evening session, the volume drops away. There are also large volume spikes that occur for a few reasons.

Economic Data – When an important announcement is released, traders rush in, to position themselves quickly on the back of a major release, such as the US non-farm payroll report.

Breaking News – When news hits the markets that are not accounted for and is unexpected, it is an opportunity for some massive gains and traders will try and act quickly to capitalize. An example might be an attack on an oil facility in the Middle East, which would quickly send the price of WTI higher.

Technical Levels – Invariably, traders and investors watch key levels and buy and sell around those levels. In many instances, stop-loss orders are on the other side of a key level and with much liquidity in those spots, it takes big volume to run price through big levels, which leads to a spike in the volume. A good example would be the run of a key round number level, that has additional psychological importance. 1.000 in the EUR/USD might be that type of level that everyone is watching closely.

Forex Volume Indicator Strategy

Volume is a vital indicator for most traders and we can use it to add depth to our trading and increase our win rate.

The most effective strategy for using a forex volume indicator is to use it in conjunction with key trading levels and price action. Forex volume can help paint a clearer picture of what is going on with price and what might happen in the future.

For example, when the price is attempting to break a key level, if we see a big spike higher in volume as price pushes through a key level, then we can assume that the big money players such as institutions are present and they are keen to keep the momentum going.

That would tell us that a break of that level is more likely to hold and we should make our trade in the direction of a break.

This would be a forex volume indicator that suggests a break out will hold.

Conversely, if there is no spike in volume into the test of a key level, then that might just tell as that this is more than likely just a run of some stop-loss orders and that the big institutional order flow is not present.

That to me, suggests that the forex volume indicator is saying that this breakout is less likely to hold and we could start looking for a failed break out a trade or a revert-to-the-mean type position.

We can also use the forex volume indicator to tell us when the price might have reached a point of exhaustion. We call this a ‘blowout’ candle and can also be known as ‘exhaustion’.

If the price has been running hard in one direction and it is met with a big spike in volume and a candle that closes near where it opened. That might be suggesting that the move has lost steam and the end of the move is close.

Forex Volume Indicator Strategy Example 

When price trades through a key level and we see a big spike in volume we know, that there is a higher probability of a follow-through.

As we can see in the chart below, the price had been trading under 1.2500 in the GBP/USD on the 5-min chart.

When price finally broke through that level, and there was a huge spike higher in the volume indicator, then we knew there would be a good chance this move would have more left in it.

GBP/USD (FXCM) – 5min.

The trade here would be to enter the break above 1.2500 as soon as you see the big spike in volume.

If there is significant volume and the indicator is two or three times higher than the prior bar, then you know that there is interest by large players and the move should follow-through.

You don’t need to wait for the close of the candle, as it can be worth getting set early and keeping your risk tight at the 1.2500 level.

As we see in the example here, price ran sharply for 50 pips within 30 minutes and there was even 25-30 pip of profit if you had waited for confirmation on the close of the 5-min candle.

In summary, the Forex Volume Indicator is one of the most useful tools in the trader’s armament and you should always be assessing the strength of a move or a break, based on the volume that is being done around that price level. 

Using forex volume will likely increase your win rate and keep you on the right side of trades. Allowing for stronger conviction and ultimately greater profit potential.