The built-in mt4 volumes indicator is probably one of the most unappreciated free tools that many don’t even know how to use. There is a common understanding among forex traders that volumes in the currency exchange market are not measurable as there is no central exchange like with stocks for example.
That might be true BUT I believe many don’t really understand what it means. Just because we can’t measure the lines below, it doesn’t mean we can’t conclude that the red line is greater than the blue line right?Advertisement
Using Volume indicators in MT4 is pretty much the same. Knowing this let’s move forward.
How to read the Volumes Indicator
As a rule of the thumb remember that a Green bar on the indicator (default colors), means that volume is increasing, as opposed to a Red bar which would mean, volume is decreasing.
MT4 Volumes Indicator Key Features
- Using volumes we can confirm the strength/weakness of an ongoing trend. Extremely useful to traders that use breakout strategies. False breaks (fake outs) are easily identified this way.
- Rising volume translates as growing demand among traders, while falling volume is read as decline in interest.
- Extreme Volume readings — Climax Volume* often highlight price reversals.
- Identify strong Support/Resistance zones – points where the price is trading with high volumes.
* A climax is a market condition that is characterized by escalated trading volume and sharp price movements at the end of a bull or bear market cycle for company shares, an index or a commodity. Climaxes are usually accompanied by extreme sentiment readings, either mass euphoria at market peaks or pessimism at market bottoms.
“Volumes is the indicator of the number of price changes within each period of a selected time frame.”
Breaking down Volumes
Volume is the second most valuable data after the price itself.
Large volume signifies that there is large number of market participants involved, including financial institutions. The last ones bring the highest turnover to the market, and if they are trading, it means the interest to the price at certain point and/or to the trend overall is high.
Small volume tells that there are very little participants in the market, neither buyers no sellers have any significant interest in the price. In addition, no financial institutions will be involved, thus a market is going to be moved only by individual traders and so the move will be weak.
Correlation between Volumes and Trend
Volume helps to learn about the health of a trend.
An uptrend is strong and healthy if Volume increases as price moves with the trend and decreases when price goes counter trend (correction periods).
When price is going up and volume is decreasing, it tells traders that a trend is unlikely to continue. Price may still attempt to increase at a slower pace, but once sellers get the grip on it (which will be signified by an increase in volume on a down candle), the price will fall.
A downtrend is strong and healthy if volume increases as price moves lower and decreases when it begins retracing upwards.
When price is falling and volume is decreasing, the downtrend is unlikely to continue. Price will either continue to decrease, but at a slower pace or start to rise.
In the first phase on the image below (blue arrows) price is in a down trend, however volume is also decreasing. That tells us that this trend is losing momentum and we can expect a reversal soon (which it actually happened afterwards).
Phase two showed progressively increasing volumes, creating a smooth up curve. This is a sign for a healthy trend. Notice the decrease in volume during corrections.
Another example but this time the down trend (the period marked between the vertical lines) comes with increasing volume. As you can see, after the correction happened, we saw a continuation down.
Correlation between Volumes and Reversals
To understand the nature of spike in volume before a trend reversal, traders need to know how the data for volume indicator is gathered in Forex.Forex volume cannot be measured precisely as it is done, for example, in Equity market, where every share traded equals 1 volume, and selling 200 shares means 200 in volume.
Forex by nature cannot count how many contracts and what sizes of contracts were traded at any given time, because the market is wide and decentralized. Therefore to count volume in Forex the number of ticks/changes in price is used 1 tick measures 1 volume. As it moves up and down volume adds up.
When volume rises, it means lots of participants are actively selling and buying currencies. When volume spikes at certain price level, traders know that there was lots of interest shown by traders to that price level. If there is a lot of interest, it means the level is an important one. This simple observation of a volume indicator allows identify important Support and Resistance levels, which would certainly play significant role in the future.
Image 3 – Identifying/Confirming Support and Resistance zones –
Where Volume spikes are distinctively extreme (larger than any historical spikes around) — Climax Volume — traders should look for clues from the price itself.
Candles that have a narrow range, spinning tops/bottoms, dojies, stars, other candles with extremely large tails have highest chances to become the price turning points.
Single volume spikes only bring price to a halt. A lot of stand-alone average volume spikes occur during fundamental economic announcements on daily basis. News can cause spike in volume for a single day and then volume disappears again.
Reversals, however, happen not over one day but a series of days. If higher than average volume stays on the market for several to many days a huge volume spike — volume climax — will crown a point of market reversal.
Correlation between Volumes and Breakouts/False Breaks (Fake Outs)
Volume indicator helps to validate all kinds of breakouts.
When market is consolidating on a low volume, a sudden pick up in volume would signify that a breakout is due.
Breakout occurring on rising volume is a valid breakout, while a breakout that caused no interest from traders as it is happening on a low volume is more likely a false one.
Trend lines and other breakouts are validated or voided the same way.
Trend Line breakout confirmed with significant increase in Volume.
False breakout predicted as Volumes were decreasing during the breakout phase.