Why volume is significant in forex?

Why volume is significant in Forex?

Feb 26 • Forex Trading Articles • 272 Views • Comments Off on Why volume is significant in Forex?

From the process of price change, we already know that it occurs due to the predominance of one of two parties – sellers or buyers. For example, if at 1.2100, you are ready to buy 200 lots, but want to sell 220 lots, then the price will decrease. This will happen because 200 lots will cover the demand, and the remaining twenty will be sold at the next price where there is demand. The greater this overweight, the stronger will be the price movement.

How volume works?

If you look at any strong trend, then when you zoom in, you will notice that it consists of constant changes in trends in smaller timeframes. The trends of this level are built from even smaller ones. This way, you can reach the very ticks, and up and down fluctuations will constantly occur. Greater the fluctuations, higher the trading instrument’s liquidity, and more the money needed to move the price. However, in the considered example, we had 200 lots. If it is 200,000 demand lots and 200,020 supply lots, the price will still move.

Relativity of volume

Just one movement cannot tell how much volume has been pumped into the market. An example that shows this well is the Asian trading session and the European one. The volumes are quite low in the first case since Asia is not at all the world’s financial center. On the contrary, in Europe, the volumes are huge, especially on the London Stock Exchange. Simultaneously, the size of fluctuations can be quite comparable, and the trading volumes differ significantly. Accordingly, we conclude that the volumes are relevant only in the context of the current situation. Their changes play a role only if they are very different from those that were very recently, and there are still accumulated pending orders, which can also significantly impact the price. The study of market behavior in this context is carried out by volume analysis.

Volume analysis

Volume analysis allows you to identify price areas where buyers or sellers are activating. For example, someone is not ready to buy a dollar against a yen for 65, but at the same time will gladly take at 63. That is, demand for 65 will be very small, the price will fall, but in the region of 63, there will be a significant amount of interest, which will not go further.

Depending on how much money there will be and how intensively purchases are made, the quote can get stuck in this area, drawing consolidation, or it can reverse sharply. Volume analysis can be called something in between fundamental and technical, but it can be used in conjunction with both. After all, any technical level attracts attention, orders will accumulate around it, which will immediately be revealed during the market volume analysis.

It’s the same from a fundamental point of view. For example, oil at $ 20-25 per barrel is already near the cost threshold, so producers will begin to cut production and stop selling at such low prices and what we see in practice is that oil rebounds rather rapidly from the levels of $ 27-29 per barrel.

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