29 July, 2019 | AtoZ Markets – Forex volume indicator may boost your trading profit. This indicator will teach you how much volume is required to confirm buy and sell trade signals. More the volume oscillator indicator will reveal the formula behind the Forex volume readings.
Stock traders know the importance of volume analysis as it is visible to all traders. Volume, interest and price action are the key components in any stock trading decisions. However, unlike stock trading, the volume is rarely used in the Forex market. And, there is a solid reason for that.
The foreign exchange market is a decentralized market where trading happens without any central interventions. Therefore, there is no formula for measuring volume or method of keeping track of the contract number and contract size. However, it is possible to trade in the forex market with a volume oscillator indicator and we will see some ways by this article.
What is Forex Volume Oscillator indicator?
Forex volume indicators are those that vary over time within a band. A volume oscillator is a part of the oscillator indicator. In this indicator, volume tracks the bullish and bearish activity on the specified timeframe. This technical tool mostly has the shape of sine waves. These sine waves will vary over time, between the set band below or above the centerline.
The characteristics of the volume oscillator are mostly the same as the volatility. This indicator considers the volume as the difference between two moving averages. A fast-moving average is typically 14 days and the slow-moving average is 28 days.
The difference between the 14 and 28 moving averages works as a sine wave. However, you can change the built-in value following your trading needs.
The volume oscillator formula:
Volume Oscillator =Shorter period Moving Average of Volume – Longer Period Moving average of Volume / Longer Period moving an average of Volume * 100
Why use the Forex Volume indicator?
Many traders use lots of price action analysis but ignore the volume oscillator indicator. Using this indicator, traders can increase their profits and minimize their losses. Moreover, there are many traders who don't know about the importance of this powerful tool. Sometimes traders get confused as there are several types of volume oscillator indicators.
In the forex market, the price goes up when the buyers dominate the market and the price goes down when the sellers dominate the market. The volume oscillator indicator has the capacity to draw the attention of any unusual buying and selling activities in the market. In this indicator, price moves from the period of low volume activity to high volume activity and vice versa. Therefore, the ability to spot these activities can help traders to trade alongside the big players.
High volume, either in the bullish or bearish side can generate trends or an indication of the change in the trend direction. Volume analysis can help you predict these trends before they are visible on the chart.
How to Trade Forex Using Volume Oscillator Indicator
There are several ways to trade forex using the volume oscillator indicator. Of them, we will see some of the well-known strategies.
Confirmation of Breakout
In the forex market, breakouts have a higher failure rate. The reason behind this is that it is very easy to reduce the price from higher to lower instead of higher to higher. In any market, an increase in price reduces the interest of buyers. As a result, price falls higher to lower.
Moreover, a breakout is just breaking below or above the recent high or low. There is no mystical Fibonacci level or a trendline. Therefore, it becomes harder for traders to determine the sustainability of any breakout.
A volume oscillator allows traders to know whether the breakout will sustain or not. Any breakout with higher volume indicates an involvement of smart money. Therefore, the breakout with higher volume will be successful and traders can enter the trade after some corrections with their trading strategy.
In this chart, the volume oscillator got a bullish breakout after a correction. On the other hand, Price got a bearish rejection with a candle close in the same period. This is a perfect example of identifying the trend reversal with a volume oscillator. However, you can find many unsuccessful breakouts that are also indicated by the volume oscillator.
In this chart, price breaks out the resistance with a candle close. But as the movement was not supported by the Volume Oscillator, price reversed.
Continuation of a Trend
In any trend, the price doesn't move like a rising rocket or falling knife. It makes some corrections after an impulse and continues the current trend. We can measure the volume of a current trend to identify the strength of the trend.
A bullish trend with the bigger volume on the bullish side indicates that the current trend is strong and any trade setups towards the bullish trend will be more successful. Therefore, you should follow the bias in case of taking any trading entry.
In this picture, the bullish trend is supported by the volume oscillator indication. As a result, the trader can take intraday trade entry towards the direction of the price.
Volume Oscillator in Choppy Markets
In a choppy market, buyers and sellers usually fight with their trading volumes. As a result, you will see a bullish pressure in the volume Oscillator indicator. Still, it will dominate by another bearish volume oscillator immediately. Therefore, the volume Oscillator indicator doesn't work well in the choppy market.
You should be careful and probably avoid trading in the choppy market with this indicator. However, you can monitor the market and wait for a breakout towards any side to join the rally.
Trendline Trading on the Volume Oscillator
Another method to trade with the Volume Oscillator is to draw trendlines on the indicator. The aim here is to identify breakout patterns on the indicator to signal the trend.
The best use with the trendline is the identity of divergence. As we know, the divergence is basically the opposite reaction of price and oscillator. There are many types of divergence, but the main concept is the same. Any divergence in the price and oscillator is a possible price reversal signal.
If you find that the price is making higher highs indicating uptrend, but the volume oscillator indication is making lower lows. There may be some problem with the trend. In that case, it is unlikely to say that the price may reverse. Therefore, you should wait for an appropriate selling entry with your own trading strategy.
The Forex volume oscillator is like other indicators that can prove useful when combined with the price action and trend lines. In addition to that, understanding the market context is the key to any forex pairs. You should know the four main elements of the market context, including market volatility, non-volatility, impulse, and correction.
Think we missed something? Let us know in the comments section below.
The article was updated by Samson and originally published on 12 December 2019 and updated on 29 July 2020.