Forex trading volume can be very useful to the forex trader. Apart from being used as a filter for trade signals, trading volume can also be useful in several other ways.
It is a common belief that the volume information that you can obtain from your retail broker is not of much use to you as a forex trader.
The misconception is that because this volume may be but a drop in the bucket of the volume of the entire forex market, that it is not of much use. However, research has shown that the volume information provided by your retail broker, is useful in that it may provide a fairly accurate reflection of percentage changes in overall market volume in a given time period.
There are some brokers that actually make institutional trading volume information available to retail customers. Among the forex brokers that provide institutional forex volume data to retail traders are Oanda and Dukascopy . These two brokers provide what is known as “tick volume” data which increases the usefulness of the volume information to the retail forex trader.
When the trading volume information between these two brokers are compared, it is evident that both data sets reflect very similar information when viewed in terms of percentage change in trading volume. The implications of this are that the trading volume provided by your retail broker, may actually be more useful than you think, when viewed from a percentage change perspective.
One of the most useful ways to use forex trading volume, is to use the information to inform your trading decisions. For example, high trading volume accompanied by a drop in price, may be a strong sell signal. Without the large trading volume, a price drop may simply be a temporary dip that is unlikely to be sustained.
Similarly, high trading volume accompanied by many significant price drops, may be a great buy indicator. Forex trading volume can prove to be very useful when the data is used along with other information to make trading decisions.
Volume in forex trading can indicate exhaustion, accumulation, the strength or weakness of a trend and so on. However, forex trading volume used in isolation will not be of much use to the forex trader. Neither should great emphasis be placed on volume without “confirmation” or “correlation with other trading indicators.
In summary, forex trading volume can be very useful in forex trading and should not be discounted as useless because there is no official volume data. Traders should appreciate that the volume information provided by retail brokers can be of great value when viewed from the perspective of percentage. However, forex trading volume data must be combined with other trading indicator information, to be of maximum use.