Forex trading is a highly volatile market where prices can change drastically in a matter of minutes or even seconds. To be successful in forex trading, traders need to have a good understanding of market trends, technical analysis, and various trading strategies. However, one important aspect that is often overlooked is the use of normalized volume. In this article, we will discuss what normalized volume is and how it can be used in forex trading.
What is Normalized Volume?
Normalized volume is a technical indicator used to analyze the volume of a currency pair traded in the forex market. It is a normalized value of the volume that is calculated by dividing the current volume by the average volume over a specified period. The period used for calculating the average volume can vary depending on the trader’s preference, but the most commonly used periods are 10 days, 20 days, and 50 days.
Normalized volume is represented as a line graph, and its value ranges from 0 to 1. A value of 1 indicates that the current volume is equal to the average volume, while a value of 0 indicates that the current volume is zero. The main purpose of normalized volume is to provide traders with a clear understanding of the market trend and to help them make informed trading decisions.
How to Use Normalized Volume in Forex Trading?
Normalized volume can be used in various ways in forex trading. Below are some of the most popular ways to use normalized volume in forex trading:
1. Identifying Market Trends:
Normalized volume can be used to identify market trends. When the normalized volume is above 0.5, it indicates that the market is bullish, and traders should consider buying the currency pair. On the other hand, when the normalized volume is below 0.5, it indicates that the market is bearish, and traders should consider selling the currency pair.
2. Confirming Breakouts:
Normalized volume can be used to confirm breakouts. When a currency pair breaks out of its resistance or support level, traders should check the normalized volume. If the normalized volume is high, it confirms that the breakout is genuine, and traders can consider taking a position in the direction of the breakout.
3. Identifying Reversals:
Normalized volume can be used to identify market reversals. When the normalized volume is high, and the market is in an overbought or oversold condition, it indicates that the market is likely to reverse. Traders can use this information to take profits or enter a new position in the opposite direction.
4. Divergence:
Normalized volume can be used to identify divergence. When the price of a currency pair is moving in one direction, and the normalized volume is moving in the opposite direction, it indicates that the market is diverging, and a reversal is likely to occur. Traders can use this information to take profits or enter a new position in the opposite direction.
Conclusion:
Normalized volume is a useful technical indicator that can help forex traders make informed trading decisions. It provides traders with a clear understanding of market trends and helps them identify potential reversals and breakouts. However, traders should not rely solely on normalized volume but should use it in conjunction with other technical indicators and fundamental analysis to make the best trading decisions.
