What is Trading Volume in Forex Trading?

Dapatkan Dana

What is Trading Volume in Forex Trading?

Successful Forex traders use different trading concepts to make informed decisions in the market, with volume analysis being a key factor. Volume analysis entails examining the total quantity of currency units exchanged. It allows you to understand market activity and sentiments.

By understanding trading volume, traders can predict price movements accurately, ensuring they remain profitable throughout their trading career. Volume analysis on prop firms is even much better because they trade with their own capital, generating significant trading volume, which enables liquidity and allows traders to exchange orders quickly.

In this article, we will help you understand the significance of Forex trading volume and how you can use it to remain profitable.

What Is Trading Volume?

Trading volume is the total quantity of currency units or lots exchanged between buyers and sellers at a specific period. Volume in the stock markets is quite straightforward, as it is measured by the number of shares bought and sold. However, when it comes to Forex trading, it can be hard to tell due to its decentralized nature.

That is why there are volume indicators, which allow traders to know trading activity in the market. With volume analysis, traders can tell whether the price will continue or reverse. Market volume also goes hand in hand with liquidity. When there is high volume in the market, you are likely to enter and exit positions quickly with a much lower spread.

In most cases, major currency pairs have the highest liquidity because many traders buy and sell them. Minor Forex pairs, on the other hand, have low liquidity due to few buyers and sellers.

Trading Volume

What’s the Relationship Between Volume and Liquidity

The relationship between trading volume and liquidity is intertwined. Here is how:

Trading Volume Acts as an Indicator for Liquidity: In the Forex market, you can predict the liquidity present by using volume. Trading volume tells you the total number of assets traded at any particular time. If the volume is low, market activity is also low, meaning low liquidity. If the market is liquid, then you will be able to execute orders and close them faster.

 

High Volume and Liquidity Helps in Stabilizing Prices: High trading volume and liquidity in the market help in maintaining market stability. When large trades are placed, they are absorbed without leading to price fluctuations. This always ensures fair pricing for assets.

 

Knowing the current trading volume for any asset is essential for all forex traders. Trading volume allows you to know the liquidity present in the market, allowing you to enter and exit positions smoothly. At Audacity Capital, you will receive training, mentorship, and support, ensuring you trade in times when there is liquidity in the market.

Measuring Trading Volume

Measuring trading volume in Forex trading can be pretty challenging, but you can gain insight into the market activity with tick volume, real volume, and other volume indicators. Here is an overview of how these methods work:

 

Tick Volume

Tick volume measures or shows the price changes that happen within a specified time frame. In other words, it indicates market activity or the number of traders participating in that particular time. Each tick represents price movement.

Tick volume is calculated by counting the number of ticks or the number of price changes in a given time frame. You can use the 1-minute, 5-minute, or 15-minute time frames. Then,  add the total number of ticks, which becomes the tick volume for that specific period. You can do this manually or use trading software with tick volume data.

  • Advantage: It shows market activity and indicates volatility or a period of high interest.
  • Disadvantage: It does not provide the exact transaction size, making it less precise.

 

Real Volume

Real volume is the exact quantity of a currency unit that is traded during a specific time frame. It can be obtained from major banks or liquidity providers.

  • Advantage: It is more precise as it gives a clear picture of market activity and transaction size.
  • Disadvantage: It is not readily available. You must assess premium data services or certain trading platforms.

 

Other Indicators and Methods

  •  Volume Indicators: Volume Weighted Average Price and On-Balance-Volume are indicators that may help you predict reversal and market trends.
  • Broker Data: Specific brokers may provide volume data based on the transactions made by clients. This can offer valuable insights into the market activity.
  • Order Book Data: Specific platforms provide access to the order book, allowing traders to see pending buy and sell orders that can help them gauge liquidity and trading volume.

Tick Volume vs. Real Volume

FeaturesTick VolumeReal Volume
DefinitionShows price changes that happen at a specified period.Provides the actual quantity of currency units traded at a particular period
SourceReadily available on trading platforms.Major banks and liquidity providers
AccuracyLess precise.More accurate.
UsageUsed for trend confirmation.Provides precise analysis
Market ImpactIndicates the number of tradesIndicates the actual market impact based on the traded size
AccessibilityAvailable to many retail traders.Only in specific platforms or premium data sources
Transaction sizeNo information on transaction size.Provides the actual transacted size

Volume Analysis

Volume analysis plays a significant role in technical analysis. It provides insights into the momentum and price movement of any particular currency pair. Volume allows traders to confirm trends and identify breakouts, as well as spot reversals.

Confirming Trends: Increasing volume in a bullish market indicates that price wants to continue going up. Decreasing volume in an uptrend indicates that the trend is weakening. This signals an upcoming reversal.

Suppose the EUR/USD is bullish, and the trade volume increases. This communicates strong buying interest, meaning the pair will continue rising.

Identifying Breakouts: A breakout accompanied by high trading volume shows that it might sustain. On the other hand, breakouts on low volume may indicate a false breakout or a quick reversal is about to happen.

A good example of this scenario is when you are trading on a ranging pair, say USD/JPY. If it breaks the resistance level on a high-volume market, it shows a valid breakout, which indicates the market may be going up.

Spotting Reversals: When there is exceptionally high volume in the market after a prolonged price movement, it may indicate potential reversal or exhaustion. When there is low volume, and the price has been moving in one direction, it may also show a possible reversal.

For example, if you are trading GBP/USD in a downtrend and suddenly the volume increases without a major price change, this might signal sellers exhaustion, and the market is likely to reverse upwards.

Volume and Prop Trading

Prop trading firms usually benefit from high-volume markets due to increased liquidity. This means that traders can get easier entries and exits. During high-volume sessions, the market is very liquid, and prop traders can take advantage of this by executing trades without creating major price movements.

Trades can also enjoy trading with tighter spreads in prop firms. High liquidity usually leads to tighter bid-ask spreads. This, in turn, minimizes transaction costs and improves traders’ profitability. High liquidity also reduces the risk of slippage (the difference between the expected and actual price of an asset). This creates favorable trading conditions for prop traders.

For example, Audacity Capital coordinates with an institutional liquid provider, allowing them to have the tightest spreads. This allows their Forex traders to gain massive profits and minimize losses as much as possible.  At Audacity Capital, you can get an account of up to $15,000 without an entry test.

Conclusion

Trading volume is a key concept in Forex trading that you need to understand to execute your trades confidently. Volume allows you to confirm trends, spot reversals, and identify breakouts. This concept, combined with technical analysis, will give you winning trades over a long period.

It is also crucial to explore different technical analysis strategies that align with volume analysis to improve your trading game. In Audacity Capital, you will get the best Forex trading resources to help you remain consistently profitable.  Click here to learn more.

ms_MYMalay