Forex Volume Analysis
A volume analysis of the Forex market is to study the volume of trading operations at certain price levels and identify patterns between the amount of money passed at a price and its further movement. What volumes are there? How to analyze them?
Before answering this question, it is worth understanding the pricing mechanism in the Forex market. The exchange rate is formed under the influence of supply and demand. When the buyer is ready to buy at the price that the seller offers, the transaction will take place. The value of the currency is the equilibrium price that currently suits everyone.
The exchange rate directly depends on supply and demand. If the offer is too large, the price falls. The number of sellers exceeds the number of buyers, so they are ready to lower the price in order to get rid of the asset. If there are more buyers than sellers, the rate is growing. There is a shortage of currency, so buyers compete for the right to buy an asset. They are willing to pay more. What is the place of volumes in this process?
In fact, the price of a currency does not depend on the number of sellers and buyers, but on the volume of goods. There can be only one seller on the market, whose offer is hundreds of times higher than the offers of small traders. The more volume a seller throws onto the market, the faster the rate of a financial instrument decreases. Similarly with the volume of purchases.
Volumetric analysis tracks the volume of trading operations on options and futures. Based on them, trading recommendations are built.
It is not possible to track volumes in the spot market, since it does not have a single operations processing center. Futures and options are traded on exchanges, so trading data is available.
What volumes are there?
Volumes are divided into two types: tick and stock. The former do not represent any value to the trader. They are present in the MetaTrader 4 trading terminal and display the number of smallest price changes over a period of time.
Exchange volume shows the number of futures and options contracts that have passed at a certain price. These volumes are also called horizontal. The volumetric analysis method involves the use of cluster charts, in which the number of trading operations is displayed in clusters opposite the specific price to which they relate.
The next type of volume is vertical. They show the number of lots traded per unit time corresponding to the selected timeframe. This type of volume is not informative, since the data for its calculation is based on information from a broker or an ECN network. They do not reflect the real situation and are not suitable for predicting sentiment in the foreign exchange market. They are used in tandem with horizontal volumes, namely, with a sharp surge, a strong price movement should be expected.