Trading volumes in the financial markets give traders and investors an understanding of the interest in a particular asset at the moment. If interest rises, the price momentum will continue. And with weak supply and demand, the price is likely to consolidate in a tight range. Let’s consider how to use the volume indicator to trade and open forex investments.
- What are the differences between volume indicators?
- Where can I see the trading volume indicator?
What are the differences between volume indicators?
The market volume indicator shows how many units of an asset (in lots) were traded (bought and sold) per unit of time. The higher the volume, the more interest there was in the instrument, the more likely it is that the price will continue to rise or fall.
But there is a complication: the forex market is decentralized, so there is no exact information about the volumes, as in the stock market. To get at least some information, various indicators have been invented, but they only give a rough understanding.
Therefore, Metatrader 4 and Metatrader 5 trading terminals have a built-in volume indicator. This is a tool that shows the number of price changes in an asset, the so-called tick volume. It is plotted in the form of a histogram below the chart, each column of which corresponds to a specific candle and the time frame for which it was drawn. The volume, while not fully reflecting the volume traded, does give an idea of whether the frequency of transactions increased or decreased during this period.
There are a number of proprietary indicators, such as true market volume, that are developed by traders or brokerage firms to analyze volumes. They are built on the basis of forex trading data on the Chicago Stock Exchange. By analyzing this horizontal volume, a trader can understand at what price the largest number of big player positions are concentrated, where the price level is strong, and in which direction the forex trade will take place.
Where can I see the trading volume indicator?
The volume indicator is built into Metatrader. It can be installed in a separate window below the chart from the “Insert” menu item. Find the “Volumes” section in the indicator folder and click Volumes there.
A configuration window will appear that cannot be modified. The default histogram bar colors are set to green for highs and red for lows.
The indicator will open below the chart in a new window. The rising candles will correspond to the green bars and the falling ones to the red ones. It can be noted that the larger the candle, the larger the volume, although this condition is not always met.
How to interpret the volume indicator data? A growing histogram bar indicates that the interest of market participants in the instrument is growing.
This fact is often used as an aid in trading high and low day trading strategies.
- Find a paranormal candlestick on the daily timeframe, which will be much larger than the average for this instrument.
- Make sure it is accompanied by an increase in tick volume – there is a large green or red bar on the volume indicator.
- Draw support and resistance lines along the highs and lows of this candlestick.
- Now you need to apply the trading strategy on the breakout of the level. If the candlestick was bullish (growing) and the volume also grew, there is a high probability that the resistance will break and grow by roughly the same distance.
- To open a deal, you need to switch to a smaller time frame (one hour or thirty minutes). There it is important to wait for the level to break, to consolidate above it during a rise and below it during a fall. Above the resistance, a buy trade is opened, below the support, a sell trade is opened.
- The targets in such trades are calculated based on the size of the candlestick, from the highs or lows that we are trading. Measure it with a cross and take about 80%, differing them from the level beyond which the trade opens.
- The stop-loss should be set for the level from which the position is opened: set above it when selling, and below it when buying.
The Forex Volume Indicator can be used as an auxiliary tool, especially for intraday strategies. A forex bot can take your signals into account during robotic trading. And although these volumes differ from the exchange volumes, it is quite reasonable to use them as an advisory instrument.