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What is Volume Indicator and How to Use it in Forex Trading

Volume indicator trading strategies for beginners and experienced traders in Forex

Hello friends. In the financial markets, people are increasingly trading stocks, bonds, commodities, currencies, and other financial instruments. Our goal is the same, which is to make profits in the financial markets through successful trading. To do this, we need to correctly predict market movements. In this undertaking, technical indicators, which are a part of technical analysis, assist us. Technical indicators are very important tools for analyzing price movements and identifying trends, support and resistance levels, volume, and other factors. One of these technical indicators we will now discuss is the Volume indicator.

What is the Volume indicator?

The Volume indicator is one of the more preferred tools in technical analysis when it comes to trading in financial markets. This indicator displays the trading volume or the amount of transactions of a financial asset within a specified time frame. It is usually used across different asset classes such as currencies, stocks, bonds, commodities, and other financial instruments. The Volume indicator provides insights into the strength and direction of the market by examining trading volume alongside price movements. It is particularly useful for confirming price movements and identifying trends. High volume indicates a strong trend that is likely to continue, while low volume indicates a weak trend that is likely to reverse. This helps us gain valuable support in better understanding price movements and making more better trading decisions.

Calculation and formula of the Volume indicator

The Volume indicator is a technical indicator that measures the volume of trades that occur over a given time period. It is calculated using a simple formula:

   Volume = Number of Trades x Size of Each Trade

In this formula:

  • "Number of Trades" represents the total number of trading transactions that occur over a given time period.
  • "Size of Each Trade" represents the amount of each of these transactions.

Now, let's observe a daily stock chart. To calculate the total volume of stock trades that occurred over the course of a day, we sum up the trade quantity for each trade that took place during that day. This information helps us determine the total trading volume for that day. For example, if a stock traded 100 lots at a price of $10 each, the volume would be $1,000.

To calculate the Volume indicator, we typically sum up the trading volume for a specific time frame for various financial assets. This is often done on intraday charts (1 minute, 5 minutes, hourly) or longer-term charts (daily, weekly, monthly).

Using the Volume indicator in trading

The Volume indicator can represent the volume of trades over a given time period using different chart types, such as line charts, histograms, or bar charts. This indicator helps us to analyze the relationship between price movements and volume and to understand market trends. We can trade in financial markets using the Volume indicator as follows:

Trend Following. We can use the volume indicator to determine the strength of trends and the probability of their continuation. During a period of rising prices, high volume suggests that the upward movement may be strong, indicating the current trend will continue. In this case, we can place a Buy order. During a period of falling prices, high volume indicates that selling pressure is increasing, signaling the continuation of the downtrend. In this situation, we place a Sell order. An example of this can be seen in the daily chart of AIR FRANCE stock. In a situation where the price of AIR FRANCE stock is rising and the volume is increasing, the uptrend is strong and continues. Similarly, in the same chart, when the price is falling and the volume is increasing, the downtrend is strengthening and continues:

The volume indicator is a technical analysis tool that can be used to identify trends. When the price is rising, high volume indicates that the uptrend is likely to continue. When the price is falling, high volume indicates that the downtrend is likely to continue.
Tracking trends with Volume indicator on Air France stock chart

Consolidation Trading. The volume indicator can be used to determine the strength of buyers and sellers during price consolidation. In a situation where a stock price is consolidating within a narrow range and the volume is low, we can say that the balance of power between buyers and sellers is relatively equal. This indicates that the price may be poised to move in either direction. We can see a clear example of this on the weekly chart of SINGAPORE AIRLINES stock in the context of trading:

The Volume indicator can be used to analyze price consolidation. When the price is consolidating in a narrow range and volume is low, it indicates that buyers and sellers are balanced.
Singapore Airlines stock consolidates on low volume

Divergences. Divergences between price movement and volume can be an indicator of a possible reversal or a short-term pullback. For example, if prices are falling while volume is increasing, it suggests that the downward movement may weaken. Conversely, if prices are rising while volume is decreasing, it indicates that the uptrend may weaken. An example can be seen in the 4-hour chart of TURKISH AIRLINES stock, where prices are rising but the volume is not supporting this rise, ultimately resulting in a price decline:

When volume and price move in opposite directions, it could be a sign of a reversal or a pullback.
Divergence between price and volume in Turkish Airlines stock chart

Please remember that the volume indicator is a valuable tool that can help us better understand price movements. However, it can also be misleading when used on its own. When trading in financial markets, we should use Volume indicators together with price movements, fundamental analysis, and risk management, and always keep an eye on the market.

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