Forex volume indicators
Forex newbies often avoid using indicators believing them to be too complicated. To find suitable conditions for entering the market, they stubbornly study numerous sources and news portals or conduct fundamental analysis painstakingly. But for some reason, they neglect one of the most useful trading tools – forex indicators.
What are volume indicators?
Trying to describe all trading indicators in one article is like counting stars in the sky. So, let us start with a group of volume indicators that offer substantial help to traders in analyzing the forex market.
Volume indicators are based on mathematical calculations of the forex volume which is the number of ticks, i.e. price changes, for a certain period of time. This group of trading indicators serves to define reversal or continuation of a trend and show false breaks of support/resistance levels. In this article, we provide detailed information about the types of MetaTrader indicators, how they function and how to apply them in trading.
Types of Forex volumes
Before studying indicators, let us see what types of volumes on charts there are:
- Horizontal volumes look like horizontal lines and can be found to the left of the price line. They show the range of price changes for a certain period of time.
- Vertical volumes have a form of a chart and they are placed at the bottom of a trading platform. Each line of this indicator reflects the behavior of a separate candlestick above the indicator. The vertical volumes show how many times a price changed during the formation of some candlestick.
When analyzing the market, you can use one of the above types of volumes or both at the same time. For beginning traders, vertical volume indicators are more accessible because they are built in MetaTrader 4, one of the most popular trading platforms. Meanwhile, horizontal volume indicators need to be installed separately.
Vertical volume indicators on МТ4
The default version of MetaTrader4 has four indicators of vertical volume.
On balance volume (OBV)
The On Balance Volume is considered the most efficient of all conventional MT4 indicators. OBV serves to reflect a correlation between an increase and a decrease in the volume of trades and tracks an asset’s price.
This indicator works mechanically: when the total volume for the day is higher than the one of the previous day, the indicator is positive. If the total daily volume is lower, the indicator value is negative. When a price moves in one direction, OBV is also moving. A significant difference between the price and OBV indicates a weak market movement. At the same time, high volume clearly confirms the trend.
Most often, price movements are triggered by fresh economic news. Some important releases may cause the formation of a new trend. Besides, a current market trend may continue or extend.
Accumulation/Distribution
The Accumulation/Distribution indicator is based on the trading volume indicator and reflects the cumulative cash inflows (outflows) by comparing the closing prices with the corresponding highs and lows.
This indicator is based on data about changes in the number of sell or buy trades. So, a rise in the indicator means that buy trades prevail while a decline signals selling pressure. The extremes of the Accumulation/Distribution indicator reflect the prevailing trend in the market. The discrepancy between the chart and the indicator signals that a trend will reverse soon.
Volumes
This indicator reflects the activity of market participants over a certain period of time. Investors use the Volumes indicator to see the number of changes in the asset’s price. A decrease in this indicator indicates a cash outflow from the foreign exchange market, and vice versa, its growth indicates a cash inflow and, consequently, an increase in the cost of turnover. The Volumes indicator should be read in conjunction with the price movement of a financial instrument.
Here are some of the trend confirmation signals:
- The growth of the indicator along with the increase in prices reflects bulls’ strength
- The rise in Volumes with a decline in prices demonstrates the sustained strength of bears
At the same time, the drop in Volumes indicates a change in the market sentiment.
When trading along the trend, traders need to keep track of the moments when Volumes decrease while prices increase. If there are any signs of divergence, it is better to close the position and wait for a reversal.
Money Flow Index (MFI)
This technical indicator reflects the rate at which funds are invested in a particular asset. MFI makes it possible to assess the intensity of cash inflow into a financial instrument by comparing negative and positive increases in value for a particular period of time, taking into account trading volumes.
Quite often, the Money Flow Index indicator is used to analyze oversold or overbought conditions and find potential reversal points. It is important to factor in:
- The difference in the MFI and price charts. When the volume indicator declines and the price rises, it means a reversal is possible in the short term
- The indicator levels above 80 and below 20 indicate the peak and the bottom of the market
Horizontal volume indicators on МТ4
The key difference between horizontal and vertical volume indicators is their purpose. The horizontal ones demonstrate the levels that are important to consider when looking for entry points. At the same time, the vertical volume indicator serves to confirm the trend and identify divergence.
Horizontal volume indicators are not built in the MetaTrader 4, and they can be free or paid.
TPO (can be downloaded for free)
Currently, there are two versions of this indicator:
- TPO
The TPO indicator displays the tick volume that was registered for a given price level. The readings of this indicator in the form of a histogram can be found directly on a chart of a currency pair. TPO enables traders to define the market profile using the same timeframes. TPO is intended for intraday trading strategies.
- TPO Range
This is a modified version of the TPO indicator. It helps to analyze the volume over a certain period of time. TPO Range is a kind of false signal filter for investors who practice medium-term and long-term trading. This indicator is usually added to the same currency pair chart as TPO.
VP position
This horizontal volume indicator is also provided for free and is quite popular among traders. The secret of its popularity lies in the possibility of placing it not only on the graph line but also on both sides of the screen. VP position distributes trades by price levels in the selected time frame. The indicator is displayed in the form of a histogram, the width of which shows the number of trades carried out on it.
Depending on the settings, the location of the indicator on the chart also changes: with a zero value the volume indicator is placed on the chart, with a value 1 it is located on the left, and with a value 2 on the right.
To sum up
Unfortunately, beginning traders often undervalue forex indicators. This biased attitude towards market calculations results in losses and lost profits for investors.
Do not hesitate to use indicators. You can start by analyzing old charts, gradually moving on to more volatile and exciting situations in online trading. Most likely, you will have doubts and make mistakes at first. For Forex beginners, the best test of knowledge in practice will be trading on a demo trading account. You can challenge your skills on the InstaForex demo account. Good luck!