There’s a fair amount written and spoken about volume analysis in forex trading, volume spread analysis, VSA, etc. but, in very simple terms, volumes can be a good indication of who’s doing the buying and selling – is it large volume professional money going into the market, or is it just the smaller traders twitching the currencies around a little at the moment?

Low market volume can mean false signals
All other factors being equal, it just takes less to move a market during periods of relative low volume – stands to reason. And so, volatility must be greater, with the arrival of false signals, whipsaws jumping around and therefore not the greatest time to be trading.

This is a question of news event pressures, time-frames, and indeed, time-zones – if you are able to identify the critical trading periods and look towards sticking to these you’ll have a much better chance of avoiding biting on dubious signals. You’ll also avoid the frustration of staring into a chart during low activity and thinking you have to make a trade sometime – there’s a pip-loser if ever I saw one….

Professionals aren’t like you and me
Large money has different imperatives due to the positions taken up. Although it can be something of an oversimplification, consider the effect of a large trader unloading a position – yep, the pair price would be driven down unfavorably by their own pressure – so in this situation, the large trader will be looking to unload into the face of a relative uptrend, keeping everything in some kind of equilibirium. (And vice-versa in getting out of a short position).

Volume gives an indication, during a trend, of the pressures that may be acting on that trend – in terms of support or resistance and pivot points, large traders will be looking at these just as much as you will – although they might not have the same plan in mind.

Chaos
One other thing – large traders go wrong, perhaps just as much as you or I. They can do things that lead nowhere, make no real sense in retrospect, and we just have to cope with the consequences… good luck…

2 Responses to “Forex Volume Analysis”

1. Forex Volume Analysis says:

   February 3, 2009 at 6:44 pm

   [...] Original post by ForexPerform [...]

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2. Forex » Forex Volume Analysis says:

   February 3, 2009 at 7:28 pm

   [...] the rest of this great post here [...]

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