Volume

Volume is a significant influencing factor encountered in trading. Being decentralized, the Forex market does not use a specific volume formula to track the contract magnitude or their numbers, as is done for the stocks. 

How to measure the volume

Tick movements are counted to measure volume. This is done as the price movement here happens in up or downticks. So, tallying them for a downward or upward swing in a timespan can help measure the volume. And, the transactions do not factor in the occurrence of a price movement while the remaining outcome is measured.

In other words, rather than assess the system, the emphasis is on how much price movement has befallen in a span. This does not take into account the number of selling and buying that led to the movement of price by a single tick. The volume thus shows the ticks that had occurred.

Using volume

The movement of price defines the volume, which is used for confirmation of various factors, like the weakness or strength of a trend, distribution, and accumulation.

Trend 

For corroborating the way a trend happens, you have to consider the increase or decrease in the volume. In an uptrend, you see a volume surge as the price spikes and reduced volume on the downward price movement. If a downtrend occurs, the volume surges when rates decline and reduces when the rates spike.

To spot a waning trend, the volume is very useful. When a price move is too high or too low, and there is no confirmation of volume that supports the new levels, it will signal a weakened trend or an ending trend, indicating sideways movement.

Breakout 

In a consolidation situation, volume measurements are very low. When the consolidation pattern, like flag or triangle, breaks, the volume increases and confirms a sustained breakout.

Accumulation

In accumulation, buyers dominate the market. A volume surge when occurring during the market correction in response to a downtrend signals more buyers with the possibility of reversal. This can be established when closing rates are high, while there is the same volume increase as the previous day. If, in the case of a volume surge, no downward price movement happens, accumulation is confirmed. 

Distribution

In distribution, the market is dominated by sellers. When an upward trend and correction of the market happens with a surge in volume, it indicates that the number of sellers is growing and that there is a possibility of reversal. This is established when there is no surge in the rate despite a surge in the volume. Further, the finishing prices are reduced despite a surge in the volume.

The AD (Accumulation, distribution) value denotes the balance of the accumulation and distribution and the formula used is found below:

AD = Close – Open/high – low * Volume

A low AD value reveals the distribution or currency selling, and a high indicator reveals buying or accumulation of a currency.

Final Thoughts

Trading within a range ensures there is a small volume as traders are conflicted about the direction of the market. When there is a breakout from the range of the trading, along with volume surge, traders on a losing streak exit fast. Conversely, if the volume is low when there is a breakout, it signals that traders should not consider the fresh drift as the market struggles to maintain the balance.

If there is a drop following a bullish trend, there is a volume surge, but if the drop in price is sustained with a drop in volume, it reveals inactive buyers and sellers. In the event of the volume being influential, it is a general indicator that points to the halting of reaction while the bull trend is looking to resurrect. This indicates a long position for traders.