Unlike exchanges that process stocks via a clearinghouse, the forex market is comprised of several commercial banks, proprietary trading firms, hedge funds, and individual traders. The fragmented nature sees forex transactions operate via electronic platforms in the absence of clearinghouse and a primary exchange. The foreign exchange market is decentralized and processed over-the-counter (OTC), which is an off-exchange transaction between two parties. This makes measuring the overall forex volume impossible.
As a result, the volume data investors see on MetaTrader 5 (MT5) and MetaTrader 4 (MT4)platforms are fed by the broker. This means the volume reflects the trading activity of the broker’s clients and not the entire foreign exchange market. This may lead to varied volume readings across different brokers.
Forex Volume in the Forex Market:
Trading volume is an important tool for forex traders to potentially configure trading strategies. A higher trading volume represents more market liquidity with more buyers and sellers; conversely, a lower trading volume signs less liquidity with less willing buyers and sellers.
Volume in the Forex trading is measured differently from the stock and futures market. The stock market volume is measured by the number of shares traded. The futures market volume is measured by the number of contracts bought and sold. Forex traders may expect Forex volume to represent the number of lots traded; however, most CGD/Forex brokers display tick volume, which represents the number of times the price moves up and down. Evidence suggests that FX tick volume can be used as a proxy for the FX market trading volume.
Trading Strategies using Volume
Forex trading, commodity trading and share trading all require some form of strategy. Generally, either fundamental or technical analysis will be used to formulate the strategies alongside risk management protocols.
Read more on:
Fundamental Analysis Vs Technical Analysis
The breakout strategies are popular to use in combination with the volume indicator, particularly around support and resistance levels. Breakouts supported by high volume are an indicator of strong interest behind the move. The lack of volume may indicate a weaker interest and a potential fake-out.
Moreover, trade patterns can be reaffirmed with volume. For instance, in a common bullish flag configuration, volume generally rises with the formation of the flagpole and falls during the pattern’s consolidation. A subsequent successful breakout should expect strong volume to be accompanied by.
Besides the traditional Volume indicator, there are other forms of volume indicators including On Balance Volume and Money Flow Index on the MetaTrader’s packages.
Key events this week:
- Australia Employment Data (Thursday)
- China 1Q GDP (Friday)
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