Forex Trading Volume

A common harbinger of a change in foreign currency rates is an increase in Forex trading volume. Unlike with trading stocks on the NYSE or NASDAQ a Forex trader does not immediately see Forex Trading Volume. This is because Forex trading takes place around the globe. The major markets are not all open at the same time but Forex trading volume in London can give a clue as to what will happen in New York and then in Tokyo. Forex trading volume is largely a technical cue and useful indicator of changing market sentiment.

Market Changes

Many successful traders use Forex trading volume as an indicator of the strength of a trend or change in the market. In a market that is trading sideways there may be a sudden rise or fall in the price of one currency versus another. If that move is accompanied by a substantial increase in Forex trading volume it is more likely that the trader is seeing a new trend emerging. In case where Forex trading volume does not really change as prices change the implication is that the trader is not seeing a new market trend and that the market will soon correct itself. Used with other indicators of market reversals such as the Doji signal in candlestick trading, an increase in Forex trading volume can help traders make strong profits with a timely trade or two.

Just How Much Is Enough?

Just how much of a change in trading volume is enough to indicate a change in market direction? The issue for traders who use Forex trading volume as an indicator of true changes in market direction is just how much do you need to see to trust the indicator. The problem here for a trader is that if he jumps too soon he may be following a false lead and if he jumps too late he may miss out on a trading opportunity. Obviously when Forex trading volume doubles it is significant and when it rises less than five percent it may not mean much. A practical approach is to watch as volume figures emerge, act upon persistently rising volume and reconsider when Forex trading volume falls.

Using Forex Trading Volume to Confirm

There are lots of trading strategies and lots of trading signals. Many traders do just fine without a lot of consideration of Forex trading volume. When, for example, there is a Forex response to violence in Ukraine it is easy to assume that the Ruble will suffer as well as perhaps the Euro. A trader may act upon the news of events like the Russian annexation of Crimea and use the subsequent increase in Forex trading volume as confirmation of his trade. Likewise, if he jumps into a trade and sees a small profit only to see that trading volume does not go up he may choose to get out with his profit before the rest of the market corrects. Because of the fast paced nature of online Forex trading, the use of trading volume as a backup indicator may be its best use.