Forex Trading Volumes – What Is It And How To Use Them
In this article
The abbreviation VSA stands for Volume Spread Analysis — the analysis of changes in trading volume. The ability to correctly determine this indicator in MetaTrader 4 is the key to successful work in the financial markets and forex broker trading.
The average trader will not be able to globally influence the market situation due to insignificant capital in management, so the most reasonable solution would be to determine the mood of significant players and follow them.
Futures exchange volumes
If we compare the price charts of the EUR/USD currency pair and EUR futures on CME, then the prices will be almost the same. The difference is the basis — a small value. It is important to note that at the time of the futures contract expiration, the prices for these assets will become identical.
Unlike Forex, the futures market is centralized and strictly regulated (CME (Chicago Stock Exchange) rules stipulate the size of contracts for each future). Therefore, it is much easier to analyze the trading volume on this site.
Trading on the principle of the market maker behaviour model is a win-win tactic. Working on this principle, it is possible to always remain in profit. However, there are several difficulties that make it pretty challenging to determine trading volumes in the foreign exchange market accurately.
The main difficulty lies in the very structure of Forex. Unlike the New York Stock Exchange NYSE, the foreign exchange market does not have a single trading platform. It is globally decentralized.
This means that not only private investors and market makers but also significant investment funds, as well as national and commercial banks take part in trading every day.
It is almost impossible for an ordinary trader to accurately determine trading volumes in the foreign exchange market in real time. Therefore, it is recommended to turn to third-party sources of information.
At the same time, it is essential not to focus on specific bidders. This will hinder the definition of the big picture. Using information resources, a relative idea of the current affairs in the foreign exchange market should appear.
To determine the relative value, it is recommended to use 2 main methods:
- Pay attention to the trading volumes of the futures market since this indicator is a kind of mirror of events.
- Use tick volume. It may seem strange, but this indicator can provide the trader with precious data on the current situation in the foreign exchange market and is used along with futures to determine the trading volume.
The Influence of Forex Volumes on the Price of a Currency Pair
In terms of volume analysis, the main driving force in the market is big money. It is believed that large market participants in investment funds, banks, and international corporations can reverse or strengthen the trend.
To make money in the market, it is enough to follow big money, that is, open positions in the same direction as the big players.
A solid directional movement should be expected if participants with large volumes enter the market. If the volumes increase, the price also increases. The fall leads to a decrease in the value of the asset.
Horizontal and Vertical Volumes
Forex volumes are of several types. The above-described tick volumes, show the number of price changes. There are also horizontal and vertical ones. Let’s figure out what is the difference between them.
Vertical volumes are located under the price chart. Unlike tick ones, they show the total number of traded lots for some time. However, only one specific site is used to collect statistics. The Exness broker provides the data. For example, Exness maintains such statistics.
Horizontal volumes are more interesting for traders. They are displayed on the right or left side of the screen as horizontal bars, the length of which corresponds to the number of traded lots at a specific price. With their help, you can determine the interest of traders to certain levels and calculate support and resistance for a currency pair.
Where Can I Find Volume Information?
Information on the number of completed transactions for a particular instrument can be obtained from Forex volume indicators. The standard tool that shows tick volumes in MT4 is called the CTRL+L keys.
There are 2 more popular horizontal volume indicators:
- Better Volume (it also differs from the previous one in that it highlights critical volumes in red);
- VSA Trader system (complex of indicators for volume analysis with paid access).
To analyze horizontal volumes, the Market Profile tool, the Cluster Delta service, the Ninja Trader analytical platform, the Atas trading program, and CME exchange bulletins are most often used.
Each type of Forex volume on the market should be understood with advantages and disadvantages. Tick ones show only information on the number of transactions in isolation from their actual volume, stock exchanges have a too-small set of futures, and ECN network volumes have data from one specific site.
Before using any tools, learn all about the input sources that the program uses to calculate.
To work with volume indicators on Forex, we recommend using the services of trusted brokers like Exness.
Trading volumes indicate the activity of significant players in the financial markets. With a more thorough study of this indicator, it is possible to accurately determine the direction of the price movement and its intensity.
There is a trading axiom: “great changes in the foreign exchange market provoke an imbalance in supply and demand, and the VSA indicator will help determine the current trend and follow it.”
An injection of significant capital can change the current trend. Thus, the correct interpretation of trading volumes in the foreign exchange market will allow you to understand what is happening accurately, ignore the false signals of the indicators and follow the large bidders.
A popular rule among experienced currency speculators is “follow the smart money.” It implies following the strategies of market makers — large investment companies. It is possible to track their method through trading volumes.
This Forex indicator allows you to determine the correct trend in the development of the price chart and its intensity. Therefore, using Forex volumes in your strategy is a prerequisite for profitable trading.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst