Using Volume Indicators For Confirmation In Forex Trading – Understanding and using volume in technical analysis is essential in trading. Volume indicators can confirm trends, chart patterns, predictability of breakouts and more.
When trading stocks, you get a clear picture of rise and fall in volume as Stock Exchange provides transparent information. In the world of Forex, things are not so simple.
Using Volume Indicators For Confirmation In Forex Trading
Forex market is decentralized. Therefore, it is not possible to count all the contacts and their amounts in a way similar to the stock market. Therefore, Forex traders are using indicators based on the number of ticks.
Volume Profile: Indicators
A tick is a change or movement in the quote in any direction. Trading platforms measure the number of ticks during a given time frame. Therefore, market activity can be seen to rise and fall without weighting the number of actual transactions. An increase in volume indicates that new traders are entering the market. Increases in liquidity and assets provide the energy needed to start moving.
In this guide, we will talk about the 4 most important Forex volume indicators that are widely used by professional traders when performing technical analysis:
Integrating volume into your technical analysis can greatly improve your results. Increasing volume increases the pressure on the market. Therefore the liquidity is higher. More participants are placing orders and closing positions at the same time. As a result, circulation is more intense. Spread is the difference between the bid and the ask price. Spreads on major and minor Forex pairs are generally tight but some of the exotic ones come with crazy spreads.
Important announcements are usually preceded by low volume and liquidity. A sudden increase in volume can be followed by sharp movements in the market.
Volume Price Confirmation Indicator
Many traders only use chart patterns, support and resistance levels to spot trading opportunities and volume indicators for entries and exits.
Let’s say you are in a trend and a volume indicator stops supporting the trend by showing a decrease in volume, this could be a signal to close the position or use a trailing stop before a reversal occurs.
High volume is energy that can complete chart patterns, break resistance and support points and continue trends. On the other hand, a sudden drop can indicate that there is no energy to overcome significant resistance levels or that trends continue.
In Forex, the Volume indicator measures the number of price fluctuations within each period of the selected time frame.
Aliev Fx Volumes Indicator
The indicator consists of 2 color bars. The red bar means that the volume of the bar is lower than the volume of the previous bar. The green color means that the volume of the bar is greater than the volume of the previous bar.
The indicator shows how much strength is behind the trend. In the event that the trend in the market is bullish for a long time and Volume gradually decreases, this may indicate that the bulls are losing steam and the trend will reverse. A rising trend should be accompanied by increasing volume to connect a trend signal. The same type of thinking works for a downtrend.
Volume On Balance indicator can be seen as the single blue line as shown in the example. The indicator moves between negative and positive values. A balance has a positive value where the recent price is higher than the previous closing price and vice versa.
Additionally, OBV line can indicate a potential breakout. When the market is in a range, you should watch the indicator because it can increase to predict the possible breakout upwards and vice versa.
Volume Profile Visible Range Indicator
Keep in mind that the indicator does not incorporate all the critical data and OBV is best used in context. In addition, the OBV does not provide reliable signals on shorter time frames. In general, short time frames are known to be noisier. That means, the market can predict a lot of the moves. Volume usually decreases before major announcements such as: interest rate decisions, Consumer Price Index, unemployment data, etc. And as the news comes out, traders start placing orders and volume increases. Reactions to news can be predicted for technical indicators because the news belongs to the field of fundamental analysis.
The Money Flow Index Indicator looks very similar to a Stochastic oscillator. The main characteristic of the indicator is that it incorporates volume. MFI produces 2 main signals:
Whenever the Money Flow Index crosses the 80 level up, traders start to expect that the price is in a pickup. The opposite is true for level 20. In this way, MFI acts like the overbought and oversold indicator.
If the trend is bullish and the MFI line is bearish, this could indicate a reversal. Trends need energy to keep growing. And volume indicators reflect that energy. That is why it is important to take the volume indicators seriously.
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If the trend is bearish and while the MFI indicator keeps getting worse, that shows that the bears are running out of power and bulls could take over.
An accumulation and distribution indicator or ADI is a technical indicator that integrates volume as a weighted coefficient in price change. The indicator is very similar to the On-Balance volume indicator in terms of functionality. The indicator is widely used in trading various assets. As the name suggests, it shows when the asset is being accumulated or distributed.
When the indicator falls, it means that a sale is in progress. When the indicator increases, buyers are taking the initiative. ADI is a momentum indicator and is used by traders to predict trend reversals. The divergence between the price direction and the indicator can predict the reversal.
Now it’s time to talk about some of the limitations of volume indicators. The main limitation is that the indicator is only a technical tool. It shows what happens but doesn’t give you the answer to what motivates traders when they increase their amounts or enter the game. In many cases motivation comes from underlying reasons. Fundamental aspects such as: economic policies, political situations, global processes and many others are giving direction to the markets. But the trades are made using technical tools.
Confirmation On A Chart: Meaning And How It Works
In some cases, increasing volume has nothing to do with the fundamentals. Traders just see a nice pattern forming there and start entering the game to make a profit. For this reason, patterns become self-fulfilling prophecies.
Volume indicators are only one useful layer in technical analysis. Professional traders have well-defined rules for why they open certain trades. Adding too many layers to the rules can create analysis paralysis. For example, when you see a nice chart pattern and the pattern gives you a buy signal, while a volume indicator gives a sell signal and fundamentals tell you to wait for a Fed decision. Analysis paralysis occurs when your rules conflict and you are unable to open a trade.
Volume indicators, (technical indicators and chart patterns in general) produce many false signals on shorter time frames. The reason for this is simple: market noise. Trading is a multi-time frame activity. Position traders base their decisions on larger time frames and place fewer orders. Scalpers and high-frequency traders place many more orders daily and use smaller time frames, as a result, smaller time frame charts are characterized by more unpredictable changes in price.
It is important to take size into account when placing orders as an increase or decrease in size may indicate the level of interest in a particular product. The higher the interest in a trend, the more likely it will continue and vice versa.
Better Volume Forex Indicator: One Of The Best Volume Indicators
Volume indicators can confirm a chart trend or pattern, signal reversal, forecast, etc. Volume indicators show the interest in any particular asset. However, it is important to note that volume indicators work differently on stock markets and Forex because Forex is a decentralized market.
Volume indicators do not incorporate all the critical data such as fundamentals into their signals. Therefore, volume information is best used in context. In addition, the indicators tend to give many misleading signals on shorter time frames due to market noise.
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The On Balance Volume Indicator: How To Make Money On The Market Equilibrium
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