Forex Volume Indicator Explained – What is the Volume Indicator
Are you interested in becoming a successful and wealthy Forex trader in the future? Would you like to earn huge profits doing foreign exchange on a daily basis? If so, you must be aware of the volume indicator. You must understand why it’s essential for your trading business. In this article, you’ll find the forex volume indicator explained by experienced traders.
First of all, you must be fully aware of the volume’s meaning in order to understand its importance. On the Forex market, the term volume refers to the number of “ticks,” which are price movements that appeared in time intervals. Volume indicators are those that strictly account for the volume.
What does the volume indicator refer to strictly?
In other words, the term “volume” refers to the amount of security or asset that changes hands over some time. Most often, it happens during the course of the day.
So, to be precise, the volume indicator is a kind of a mathematical formula that is visually represented most often in using charting platforms. It’s crucial to know that volume is a significant indicator in technical analysis since it’s there to measure the relative significance of a single market move.
Before we move any further with getting the forex volume indicator explained, let’s move the low and high volume, shall we?
Meaning and importance of low and high volume
If the volume is 25% higher than the average volume during the past two weeks in any market, it’s definitely a high volume. On the other hand, in case the volume is 25% lower than average in the same period, we speak of low importance.
Lower volume explained
It’s interesting to know that volume is usually low when trading is in range. The reason for that is because traders are very indecisive about market direction. The eventual breakout from the trading range happens alongside a massive increase in volume since losing traders are in a hurry to exit.
In case a breakout occurs in the lower volume, it means that there is no emotional commitment to the new trend while the market is very likely to return to its range. So, when the volume is decreasing during a market rally, it means that an increasing number of buyers and sellers are being drawn into the market.
Higher volume explained
When the volume is intensely high, it means that the trend is coming to an end. What does it mean exactly? Well, it indicates that a massive number of traders losing positions are building out.
The most common situation regarding a trader who is holding a losing position for a long time is when the loss gets intolerable, and he decides to exit the market. Once it happens, the trend reverses, and the prices are going in the expected direction.
It’s all happening because traders who lack experience show similar reactions to stressful situations and leave the market at the same time.
On the other hand, professional and experienced traders exit losing positions quickly or wait for a convenient opportunity to re-enter the market.
Volume price analysis – A brief explanation
When explaining the volume indicator, it’s essential to give you a brief overview of the volume price analysis. Price movements happen because of supply and demand in traditional markets worldwide.
It means that when the demand of a product exceeds the supply, thus resulting in a higher price. In opposition to that, when the supply exceeds the demand, the commodity price comes down. It’s no secret that the financial market works in the same way as the standard market.
Imagine having a huge demand for dollars. In that case, the price against the purchasing currency will go higher. Traders who are primarily focusing on the volume achieve more than their counterparts who are ignoring it.
This is because the volume represents the total value and number of transactions during a specific period.
Why is the volume significant to investors and traders?
Calculating the volume for traders and investors is very essential for two particular reasons. The first reason is that it shows the psychological level of traders. The second one is because it’s a very convenient tool for checking or confirming a current trend.
Here is one example of it: when the price of an asset moves up with a significantly higher volume, it implies that the trend is more substantial. Therefore, it is creating a bullish signal. Contrarily, if the volume of one particular asset is moving down with a high volume, it expresses a sell-off.
When measuring volumes, it’s very crucial since volumes are fundamental indicators of divergence. Once an increase in volume in an upward trend leads to a reduction in the asset price, a divergence is very evident.
What is the fundamental principle of volume price analysis?
A price drop on a large volume is showing something caused the move. That’s what we call the critical principle of the volume price analysis while getting the forex volume indicator explained.
The event that triggered the move could be news or economic releases, such as an interest rate decision and non-farm payrolls.
What else do traders use volume for?
It’s vital to note that while doing Forex trading, traders use volume to confirm chart patterns. Some of these patterns refer to flags, shoulders, and triangles. Successful and experienced Forex traders are constantly referring to the volumes when confirming these charts.
For instance, if the volume of an asset is high, then chances are that it’ll confirm the formation of these chart patterns.
How can you use volumes for technical analysis?
In order to really get the Forex volume indicator explained successfully, we need to give you a brief step-by-step guide on how to use volumes for technical analysis. Here is what you need to do:
- Measure the strength of a trend
- Get early spot-on reversals
- Confirm a breakout
- Make sure to identify vital areas of resistance
The bottom line
If you are desperately interested in achieving a successful and long-term Forex trading career, it’s essential to read and understand the complete “Forex volume indicator explained” article. Once you learn how to read the charts and use the volume indicator in your favor, you’ll improve your trading success and therefore increase your multiple incomes on a daily basis. Good luck!
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