Volume is an important measure as to the strength of a trend and to the correct value of the currency pair.
Introduction:
The value or worth of a market move is what volume measures. If the price action is strong either upward or downward the strength of the move is measured by the volume traded for that period. Usually key market moves where volume is high are usually when a spike occurs or a time period which is small where there is more volume than normal. A price level that is set after a particularly high volume of trades is considered to be much closer to its correct value than a price level which is reached when volume is low and only a small number of investors and individuals have traded in the market.
How important is Volume:
The way volumes are calculated is different between the forex markets and the equity markets. In the stock markets 1 share is considered one unit of volume, so 1000 shares sold or bought constitutes 1000 units of volume.
The volume in the forex markets cannot be calculated in the same way as each forex trade is not a standard amount. So in the forex market volumes are calculated on the number of ticks (changes in price) there are in a session for a currency pair.
Volumes are not the prime indicators of where the price action is going but should be used as corroboration of the direction of a trend. For example when a trend begins and the volumes are not high that usually means that the trend is weak.
An increase in volume can mean that a change in the price action may be on the horizon and the direction of the price action during this increase in volume can indicate where the price action is going.
As we know a bullish market is a market where the buyers outnumber the sellers. Conversely a bear market is a market where sellers outnumber the buyers. If most buyers transfer to a short position or simply liquidate their long holdings, the price will drop.
As more buyers switch to short positions the price drops even more and this could originate a volume spike and even a trend reversal.The 60 minute chart below shows the amount of volume for each hour. The green lines show rising volume compared to the previous hour and the red lines show falling volume compared to the previous hour.
Notice how on the 13th April volume spiked when the price of the EUR/USD currency pair fell over 100 pips breaking out of its ranging attitude of the previous 2 days and continuing to fall for several more hours. This volume spike confirmed a reversal or retracement from a strong resistance level of 1.3200 down to the strong support level of 1.3000.
A market where the buyers have the upper hand is called an ‘accumulation’ market as the buyers accumulate the currency pair. Indicative signs of accumulation are that volume increases and prices move higher or at the end of a downtrend there is little movement in price and hardly any increase in volume.
Conversely, a market where the sellers have the upper hand is called a ‘distribution’ market. Where volume increases during an upward trend and the price stalls the conclusion is that there are many more sellers than buyers. The characteristics of a distribution market is where volume increases and prices move down or after an uptrend prices stall when there is an increase in volume.
Article source: etoro.com