Forex traders must understand how the market works and how you can acquire varied skills and techniques to make reasonable choices based on data and accurate information. To calculate the forex volume is one critical aspect of forex that every trader should learn about.
To calculate forex volume, you need the help of technical indicators like Volume-weighted average price, tick volume, money flow index, and On-Balance-Volume. This is not a very complex science, but it is still tedious because it is concerned with the decentralized market.Â
Please keep reading to find out how you can be skillful at calculating this forex volume and the different aspects.
Why is forex volume essential?
Volume is essential in forex and stocks trading because it shows momentum and measures the relative significance of a market move as several shares are traded in some period.
The volume shows market health, and usually increases in volatility in stocks during bullish trends indicate excellent market condition.
Volume is the traded assets’ total amount over some time. In forex, that term translates as the number of lots of currency pairs that you buy and sell. However, not many traders know about the substantial need and take action without calculating it.
Since forex is a decentralized market, you cannot easily find the volume of the market. That is because the specific volume in a particular period is unavailable, and the information is dependent on brokers’ data.
According to the large institutional traders, the brokers have data resulting from retail traders’ executions as the trades fluctuate. Hence, there is also a notion that forex volume might not be reliable for predicting price action.
How to Calculate Forex Volume?
To calculate forex volume you need to use brokers’ data such as tick movements. Volume can be measured using volume forex indicators that usually calculate a number of ticks (price changes) that appeared in the time interval for a particular asset. You can use the VWAP indicator, volume indicator, OBV, money flow index, etc. All these indicators in their formulas use previous volume and current prices changes to calculate volume.Â
5 Best Ways To Calculate Forex Trading Volume
VWAP indicator
VWAP or the Volume Weighted Average Price indicator shows the average price of a currency pair for a single day. It shows the currency pair’s value and price that exists at the time. For instance, many traders utilize this to find their weaknesses and strengths. In addition, day trends tend to find more use for it than the swing traders, as they can get data for one day.
Klinger oscillator
You can calculate the long-term money flow with the Klinger Oscillator, and it is fragile to the market’s short-term fluctuations. The traders can use it to find the negative and positive outcomes during an upward or downward movement. It compares the price movement and the currency pairs’ prices to show the results.
Tick Volume
Many brokerages and trading platforms find market participants and activities through the tick volume method. The tick is the indicator of a specific downward and upward change in the currency’s price.Â
You cannot precisely determine the contract numbers in the forex market but measure the ticks for a specific period.Â
Hence, the net effect is calculated instead of focusing on the transactions that occur during a price change. Therefore, the concern is price movement and not the transactions involved in every tick.
Experts say that the tick volume is not the same as volume and can often be deceiving. While others count it as an excellent way to find the actual volume, and after some tries, you can quickly implement it in your trading strategies and make profits.
The base is taken as volume force. This is done by multiplying trend, temp, and volume by 100. This method also utilizes the 12-period moving average that crosses the oscillator on an upswing where the trend is bullish and does the opposite for the bearish trend.Â
OBV indicatorÂ
OBV (On-balance) is a great way to find the bullish and bearish trends in the market. You can also use it to find the price actions and spot breakouts. They deduct the day’s volume from the total running open.
Money flow indexÂ
The money flow index is the technical indicator that helps find if any currency is oversold or overbought with the help of volume and price. This is an accurate method backed by experts. As per Investopedia, the formula to calculate this is:
MFI= 100-100/(1+Money Flow Ratio)
If the MFI is more than 80, it is an overbought situation, while if it is less than 20, it is an oversold situation.
Factors that impact Forex Volume
Volume is affected by multiple factors, and some of them are varying market hours, which is significant for many traders. For instance, as the European markets open, the forex volume will shoot up and decrease in the evening. Other such factors are:
- Financial information and changes like inflation vastly impact the values of currency pairs. In addition, the international trade numbers and surplus or deficits also lead to a rise or fall in values.
- Any economic breaking news is seen as an excellent chance to trade and spike values. This is especially true for the ones that are not expected.
- The traders utilize technical levels to see the selling and buying pressure existing in the market. The orders are situated along with these lines and upon rising or falling prices.
How does volume help in trading?
Experts suggest using price action and volume in combination to make decisions for prudent trading. Price movement or action is the price decision influencing tool, and volume supports that funding. The pros of utilizing volume are as follows:
Accumulation
When buyers take control of the market, accumulation occurs. Therefore, if this volume rises during any downtrend, it shows the buyers are taking over and indicates a trend reversal. If this volume increases, however, the closing price is more than the last price; if the price does not go down even after the volume increases, the reversal happens.Â
Distribution
Distribution means the sellers have taken over the distribution of the market. When an uptrend happens, if the volume increases, more sellers are entering, and a reversal can happen. If the volume still occurs, a reversal is inevitable. If the closing price goes down on the last day, the price does not increase. Even after an increase in volume, the reverse happens.
The formula for accumulation and distribution is:
AD= ((Close price-open price)/ (High price-Low price))*Volume
A falling indicator means that currency is distributed, while a rising indicator is accumulated.
How to confirm the strengths and weaknesses?
The trend direction can be determined by less or high volume. The price rises if the volume goes up, which means an uptrend. If the price falls and the volume falls, it means a downtrend.
A weak trend is determined through extreme points, but volume does not support that and can also show the trend’s end.Â
Establishing breakout
During consolidation time, the volume is less. However, the volume shoots up and shows a breakout when this pattern breaks.
The bottom line
The market volume shows how traders place reasonable trades for certain currencies. However, it is impossible to find the correct market volume for the whole market as it is decentralized. Moreover, since there is no exchange for single trades, there is no critical data.
Traders can use tick volume, Klinger Oscillator, OBV, MFI, and other tools to define the volume and place trades that are profitable.Â
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
