Volume has always been an essential indicator due to what it illustrates: the actual buying and selling that takes place. In trading financial markets, it always makes sense to interpret the imbalance between supply and demand. That is, of course, if one has access to this information. In some markets, volume trading strategies can be applied. For example, in the stock market where the number of shares is known, the traded volume says a lot about the liquidity of a specific stock. However, in the currency market, volume plays a secondary role. Here’s why.

The MT4 platform offers many volume indicators with the default settings. The one that truly reflects the volume, or the actual buying and selling, is the Volumes indicator.

Because the FX market is so large, with over five trillion dollars changing hands every day, it is impossible to know the exact volume of the market at any single point during the trading day. The volume seen on MT4 belongs only to the broker that investors have an account with. More precisely, it is a representation of the volume traded by all active investors that have an account with the same broker, but nothing more than that.

Trading with the volumes indicator

However, this doesn’t mean volume is irrelevant information in forex trading. While not as important as it is in other markets, the volume still offers valuable insight into the buying and selling imbalances, even if only at the broker level.

Here’s what it looks like when the Volumes indicator is applied to a chart:

The red and green candles in the Volumes window have nothing to do with the bullish and bearish candles on the actual chart window. Instead, they show the rise or decline in the volume corresponding to every candlestick. The chart shows the USD/JPY daily timeframe, so each bar on the volume’s window shows the rise or decline in the daily volume of the USD/JPY pair.

It is important to note the bars that stand out from the rest. This is when the brown line utilized; it emphasizes which bars have a strong volume.

When interpreting the volume, investors search for a rise or a decline. On the bottom left side of the chart, there is a red bar showing a decline in volume, but the corresponding candle on the price chart is bullish and green, hence, the market rose but with less volume. However, the very next volume candle shows a pickup in the volume and, on top of this, the price shows a bullish candle (an inside bar). It is enough to skew the bias toward the bullish, even though it was only a temporary bounce.

Other volume indicators exist, but they all have similar problems when applied to currency trading. Trading theories such as Volume Spread Analysis (VSA) simply won’t work because its phases are not relevant. Maybe this will change in the future but until then, investors use strategies like the one described here to make the most of volume indicators.

Take-aways:

  • Volume Spread Analysis doesn’t work in the currency market.
  • The Volumes indicator only shows the volume belonging to one broker.
  • Investors use Volumes in correlation with Japanese candlesticks and other patterns.
  • Volume gives an indication about the general supply and demand level.