Technical analysis and volume play a very important role in the forex market. Today, I want to show you how to interpret the signals in the context of the market structure and volume to make better trading choices. In addition, I will explain why some common indicators can be unreliable and how you can maximize your market insight.
Let’s start with a simple exercise: for a moment, imagine the market movement when prices have been trending down, then up, and now consolidating sideways. You are now at the edge of the chart and need to decide: is the market going up, down, or continuing sideways? This is a question which every trader has to answer in the process of preparing for taking a trade.
Think about it, if you were trading a real account, how would you determine your decision? At this point, pause the video, go to the chart, and think of the answer for yourself. Also, making a decision is part of real trading.
Price and Volume Movement – An Analysis
As we go further, notice how the market sometimes goes from bar to bar, maybe a slight rise or drop, but very often the tendency may be to appear in a choppy fashion. Here we will discuss some volume analysis:
Volume Insights
Traders often refer to volume spikes as signals. High volume with an uptrend might indicate a bullish move, while high volume with a downtrend signals bearish sentiment. However, spot forex volume data can be unreliable because it isn’t centralized; the data varies based on the broker or data feed.
Volume Differences
Two charts can be taken for the same currency pair, for instance the EUR/USD, from two different 30 minute time frames. From one broker to another, that information could be different both in price and volume. The other might be showing a green volume indicating a bull market when the other is showing red portraying bearish sentiment. The simplest reason being there is no centralized exchange within the forex.
Why Forex Volume Can Be Misleading
Forex trading is over-the-counter, meaning there is no single exchange handling the data. This leads to:
Volume Variations
Different brokers utilize different data feeds resulting in not necessarily capturing 100% accurate volume consistently.
Distorted Signals
Such differences may render volume patterns unreliable for both the recognition of trends and reversals.
Comparison of Forex to Futures Markets
To enhance the accuracy even further, many traders consider futures markets, such as the CME – Chicago Mercantile Exchange – a place of centralized trading:
Benefits of Centralized Exchange
Volume trends in futures markets are more straightforward, as there is uniform data among traders.
Volume Strength
Sometimes, the futures market gives very strong indications that the spot forex cannot give. A volume breakout in the futures market may indicate true buying strength, which the spot forex may not show due to differences in data feeds.
Practical Application and Timing
To further optimize trading strategies, integration of market timing tools should be considered. Examples include:
Cycle Indicators
These are the indicators that, at some time, flash potential reversals in the movement of the market. Thus, they can be held for giving any kind of indication when the trend shifts.
Free Stuff
If you’d like to start working with this, I provide a free cycle indicator at indicativewebinar.com. There’s also a pretty extensive webinar on how to use it, best practices. This tool is ideal for refining entry and exit points and adding that one more layer of confirmation.
Conclusion
A large part of the attention while operating with forex markets deals with volume data and with timing of the market. Even though volume can show some useful insights, please don’t forget about the respect of its limitations within a spot forex market.
To make more precise volume analysis, you might want to check futures markets. Also, you can improve your trading strategy by using some cycle indicators, which would protect you from false signals. For more information, feel free to visit the resources provided and apply these insights to your trading.
