volumepriceanalysis – Forex Academy

Using Volume As A Form Of Technical Support – Forex Tips & tricks

One of the problems for retail Forex traders is that there is no tool currently available that tells them how much volume – in terms of currency amount – floating around in the market at any given time. The Forex market is not like the stock market, where we can see amounts of stocks and shares being bought and sold. Although some brokers will tell you what percentage of the traders are either long or short on a currency pair, it doesn’t give you the whole of market volume. And because there are so many market makers and so many brokers out there, it is impossible to determine the amount of volume – in terms of currency – in the market at any given time.

Therefore traders have to use their technical analysis to establish when volume is high and low in the market. One of the best ways to establish volume is to look at the size of Japanese candlesticks. For example, the longer the candlestick – and especially those which have very short wicks at either end – usually means a large volume of currencies are being simultaneously bought and sold, pertaining to the particular pair a trader is focused on.
Logically, the times when traders are more likely to see large volumes going through in a pair is likely to be around the times of economic data releases, in particular, those relating to GDP, interest rate decisions, employment, imports and exports, and manufacturing.

We might expect to see smaller candlesticks and, therefore, smaller amounts of volume in a pair in areas of price congestion, price consolidation, and also quiet times in the market, such as time zone overspills.

Let’s look at the example ‘A’

This is a 4-hour chart of the GBPUSD pair, also known as Cable. We have split the price action in this period into three sections marked, ‘A,’ ‘B’ and ‘C.’ In area ‘A,’ price action has gravitated to the bottom, which is a key level of support at the 1.22 exchange rate. This is technically a period of consolidation and sideways trading because no trend has been allowed to develop to the upside or downside. Let’s now turn our attention to the area ‘B,’ where the candlesticks are very small and where price action is merely fluctuating around the 1.22 to level. The candlesticks are very small, and this can only mean one thing: that volume is thin in this area. Now let’s take a look at area ‘C.’ We have marked the first candlestick as number 1 and where price action has accelerated away from the 1.22 level to just above the 1.24 level; again, this is a key level. We also note that there are small wicks at either end of the candlestick. This candlestick has also taken out or engulfed the preceding candlesticks in areas A and B. This is a strong move to the upside, and was a lot of volume has gone through during this 4 hour our time frame. Candlestick number 2 is also a large candlestick, although it does have a small wick at the top denoting a decrease in volume towards the end of that period. The strong push higher with candlestick 1 and 2 confirms large volume, which kicked off what turned out to be the beginning of a trend higher in this pair.
Traders need to be mindful of potential areas of support and resistance while factoring in economic data releases, which could subsequently reverse or cause a continuation of a trend in price action.

Useful tools to be able to gauge support and resistance during technical analysis are; Fibonacci retracement, stochastic overbought and oversold, and being mindful of possible Elliott waves forming.
One key area to focus on in order to fully understand volume in the markets is an understanding of the psyche of institutional traders.

Let’s imagine that an institutional trader comes to his or her desk at 7 AM in the morning, bright and breezy, and looking for the earliest opportunity to make money for their investment firm.
Now, this guy or girl may be on a salary of over €/£/$100.000, for example, and also gets a big fat annual bonus cheque. This puts them lots of pressure to make money.
Therefore at the beginning of each session, whether it be the USA, Asia, Europe, or the United Kingdom sessions, you will find that volatility usually picks then. Therefore Forex Traders, we need to be mindful that volatility equals volume, and the greater the volume, the greater the risk of larger swings in price action.

Volume

Historically, and this is especially true in traditional equity markets, volume is often the most important indicator out there. Some people argue that volume is not overly reliable in forex markets. There is a significant debate on whether volume should be considered as important in forex markets as it is in equity markets due to the drastic differences in the amount of volume from one broker to another. Others believe that it is already (we can see volume from many of the exchanges). For the stock market and futures and almost any traded instrument, volume tells you what people are doing. And what they are not doing.

Volume helps you spot reversals and can tell you if the reversal candlestick is a ‘true’ candlestick. For example, in the image below, the hammer candlestick forms at or near the end of a downtrend. However, this candlestick (and those before it) should have increased and above-average volume. A hammer candlestick on high volume in a downtrend can be a great signal when you accompany it with another indicator, like the RSI.

Look at number one. The arrow is pointing to a very large hammer candlestick; the volume column is massive and definitely above the average volume (orange line average volume). If we look at the RSI, it is oversold. Those can be great conditions for going long!

Candlestick Principles with Volume

Volume is an extremely important component of any candlestick. A candlestick tells us what happened to move price in that period, but volume tells us how hard people fought for that movement and how much conviction was in that move. Here are some principles about candlesticks to keep in mind.

The length of any wick, either the top or the bottom, is ALWAYS the first point of focus because it instantly reveals strength, weakness, indecision, and (more importantly) market sentiment.
If no wick, then that signals strong market sentiment in the direction of the closing price.
A narrow-body indicates weak sentiment. A wide-body represents strong sentiment.
A candle of the same type will have a completely different meaning depending on where it appears in a price trend.
Volume often validates price – Any candlestick that closes at or near an important high or low should be watched very closely for how much volume was involved.

High volume near highs and lows

Volume can give a clear, early warning that a current trend (long term or short term) may be coming to an end. If you observe price moving lower, but volume starts to increase and become greater than a 20 to 30-period average, then you may be looking at the bottom of a move. In other words, the market may reverse and become bullish. Observe the chart below:

Price is declining as the price is dropping. That is a clear sign that no one is interested in buying or supporting higher prices.
As prices have continued to make new lows, notice how the volume begins to spike higher – well above the most recent candlesticks volume.
This increase in volume indicates more participation and is generally a combination of new entrants going long (buying), and those current traders who are short, have to cover and convert to long. That volume becomes a powerful variable that reverses the price action.

Key Points

Look to see if the current chart is showing new and important highs or lows.
If new highs or lows are present, observe the volume indicator. If it is rising, then that can mean the current price action may reverse.