- When institutional money adds volume to the market, it leaves a trace too big to ignore.
- Forex trading volume definition: Volume is the total number of lots traded for a specific FX pair in a set time frame.
- Forex volume is a good indicator for up-and-coming market trends and historically hints at price changes.
- Price acceleration that’s not supported by trading volume is a bad sign for traders.
- Forex traders can get volume data from brokers, technical indicators, market makers, and liquidity aggregators.
Beginners usually overlook one indicator that helps professionals earn big.
Trading volume analysis is one of the key indicators for stock markets. But the same rules may not apply to currency trading, making Forex volume a redundant indicator in the eyes of many traders. Many overlook trading volume for two reasons. First, unlike trading public stocks, currency trading is highly decentralized across different time zones and regions. Second, brokerages often draw data from personal accounts, which can misrepresent the total market volume and display rogue bars. Conversely, stock markets are centralized exchanges that keep track of every sale at a precise time, which is almost impossible for foreign currency exchange markets.
Forex market is highly decentralized, spanning across different time zones, continents, and countries.
Forex is the largest market on the planet, amounting to $1.9 quadrillion, or 2.5x the entire world’s GDP. Forex never sleeps. Markets are open 24/5 because of international time zones and advanced communication technology. The markets open at 5 pm EST on Sunday in Sydney and close at 4 pm EST on Friday in New York. The total daily volume (turnover) of all currencies that exchange hands is close to 6.5 trillion USD, according to Statista. When stacked in single dollar bills, this money could circle the Earth 17.9 times. This decentralized system and the sheer market size makes it almost impossible for brokers to get the exact number of contracts for each currency. However, traders can use technical indicators and spot accelerating volume before the price changes.
Where can you find the trading volume data for a specific FX pair?
- Forex volume is measured in real-time ticks, opposite to contracts in stock markets. Each tick represents the smallest viable price change, and a high tick frequency indicates a larger volume.
- The currency liquidity aggregators offer data on liquidity providers, which correlates with the total volume. A liquidity provider is a market maker that participates on both ends of currency trade and has the power to set new price trends.
- Our trading platforms offer technical tools that can determine volume change.
Forex volume definition can help you further understand how trading volume affects the markets.
Trading volume is the total number of all trades (lots) for a currency pair (I.e., USD/EUR) over a specific period — also known as turnover. Simply put, Forex trading volume is the amount of money that changes hands between currency traders. One person buys, and the other sells a currency. Most platforms represent volume in bar charts that are either green or red. Green bars represent more trades for a given period, and red bars represent fewer trades in a given period (5min, 1hr, 1day, etc.). Volume trading can provide insights about upcoming trends before they happen and allow small traders to trade side-by-side with smart money.
Why does trading volume analysis play a key role for smart traders?
- Volume confirms a breakout.
- Volume confirms a trend’s strength.
- Traders can recognize strong support/resistance levels.
- Identify corrections so you don’t confuse them for reversals.
- Spot trend reversals early, and sometimes just before they happen.
- Smaller traders can trade side by side with big players and institutions.
Trading volume hints at the direction of institutional money
Institutional money (smart money) comes from large financial entities that have the sole business purpose of dealing with money. Why does that matter for a Forex trader? Volume tells you what currencies are accumulating interest and which bets are losing steam. When the price goes up and the volume doesn’t change, that means that big players are not in the game. Alternatively, when the volume jumps, the price may change soon after, allowing investors to seize a lucrative opportunity and identify a new trend. Commercial banks, hedge funds, insurance companies, brokerage firms, investment banks, and sometimes even central banks can enter the market and change the price.
The 4 key indicators for trading volume in Forex markets
- Volume bar: bars offer straightforward information. Each bar displays a number of ticks (price changes). Volume bars are green when the volume goes up. Otherwise, the bars turn red.
- On Balance Volume (OBV): The indicator displays a char line that correlates with volume. OBV ascends when the added volume is higher than the previous volume and descends when the volume is lower.
- Accumulation/Distribution: Originally a stock selection tool, A/D has found a broader application among Forex traders. The indicator consists of total money flows in and out of a financial instrument (a currency pair in this case).
- Money Flow Index (MFI): MFI is an oscillator that shows money flows over a certain period. The graph displays numbers from 0 to 100. FX pairs with an MFI of 80 or more are considered overbought, while results below 20 count as oversold.
The trading volume analysis helps the little guy swim with sharks without being eaten alive.
You can trade side-by-side with the big bucks and get your piece of the cake instead of becoming the cake. Most traders often find themselves at the wrong end of the trade. Think about it, someone has to lose money for another person to win, and most people are not winning. Institutional players have more resources than individual investors and usually invest with a deep understanding of the market. Smart players use volume trading analysis to follow institutional wisdom and score the next lucrative forex investment.