Forex traders use volume indicators to measure the intensity of security trading and help identify potential price reversals. While several volume indicators are available, not all of them are equally relevant for forex trading. We’ll explore the most crucial volume indicators for forex traders and discuss how to use them to make profitable trades.
What volume indicators are and how they work
A volume indicator is a technical indicator that measures the number of shares or contracts traded in a security or market during a given period. Volume indicators can identify potential reversals, confirm trends, and estimate price targets.
There are two main types of volume indicators: absolute and relative.
Absolute volume indicators measure the number of shares or contracts traded in a security or market during a given period. Relative volume indicators compare the current level of trading activity to past levels, which can help identify changes in market momentum.
How to use volume indicators for forex trading
Volume indicators can be used to help forex traders make profitable trades.
First, high levels of trading activity can be used to confirm trends. If the price is moving up and there is heavy buying activity, this is a good sign that the trend is solid and likely to continue. Similarly, if the price is falling and there is heavy selling activity, this is a sign that the downtrend is likely to continue.
Second, changes in market momentum can be identified using volume indicators. If the price is moving in one direction, but the volume indicator is moving in the other, this could signify that the market is about to reverse.
Finally, volume indicators can be used to estimate price targets. If the price is rising and the volume indicator is increasing, this could signify that the market is overbought and ripe for a pullback. Conversely, if the price is falling and the volume indicator is decreasing, this could signify that the market is oversold and due for a rebound.
The benefits of using volume indicators when trading forex
When used correctly, volume indicators can offer many benefits to forex traders.
First, they can help confirm trends. Second, they can help identify changes in market momentum. Finally, they can help estimate price targets.
It’s important to note that volume indicators, while useful, should not be used in isolation. By combining them with other technical indicators and fundamental analysis, forex traders can better understand the market and make more informed trading decisions whilst looking at the big picture.
Examples of how volume indicators can be used in real-world trading situations
A trader sees that the price of the EUR/USD is moving higher and decides to enter a long position. The trade is going well, and the price reaches 1.1700. However, the trader notices that the volume indicator is falling, which could signify that the market is overbought and ripe for a pullback. The trader decides to exit the trade at 1.1650, realising a 50 pips profit.
A trader sees that the price of gold is falling and decides to enter a short position. The trade is going well, and the price falls to $1200 per ounce. However, the trader notices that the volume indicator is rising, which could signify that the market is oversold and due for a rebound. The trader decides to exit the trade at $1225 per ounce, realising a 25 point profit.
In both of these examples, the trader uses the volume indicator to decide when to exit the trade. In the first example, the volume indicator helped the trader avoid a potential loss by exiting early in the trade. In the second example, the volume indicator helped the trader lock in a profit by exiting the trade before gold prices recovered.