What is a Volume Indicator?

Despite Forex traders looking for every advantage possible, a volume indicator is often left as the last port of call. Many retail Forex traders first look at the graph. A currency which is going up is often seen as attractive, because it may continue to go up… but how can you check that this trend will continue? A car with a stated large engine is attractive, but why not check under the bonnet?

Feel the (driving) force

In simple terms, a  volume indicator is measure which will highlight how many securities were traded during a given period of time. Any technical trader looks at the graph, but how often do they look at what propels the graph? For the graph to keep going up or down then someone must be driving it. This means buyers or sellers. If you can work out how many more buyers than sellers there are (or vice-versa), then there is a fair chance you will have a good idea which way the graph is going.

Do not let your eyes deceive you…

Volume indicators can work both ways. Although we have spoken about using it to predict which way the graph is going next, it can also be used to explain unnatural moves. If you wake up to find a large move in a stock in a quiet period of the year (e.g. August or December) it would be a good idea to check the volume. If there are low volumes, then a sudden rash of orders, not necessarily big ones, can cause a large move, which will be more powerful than the demand suggests. The resultant spike in the share may suggest a large move, but this has been artificially created by low volumes. Something to be aware of before you jump into trading this trend!

How many volatility indicators are there?

Simply put, there are many. We have listed a few below which you can use to your advantage when volatility trading.

• Average volume: Fairly simple in that it is the number of securities that have been traded over a period of time. The devil is in the detail though: check what the time period is! It can be all sorts such as minutes or hours.

• Volume momentum: as the name suggests it measures the growing force of buyers. In effect it is a multiplier factor, where you are looking for a growing number of buyers (or sellers!) at each data point. Ideally you want to spot this early so you can 'ride the wave' and eventually get out before the momentum changes direction.

• Force index indicator: a more complex volume indicator, the force index requires a bit of mathematics. It assigns a number to the power required to move a security. It can be particularly useful to spot when a security is going to break out, before volume momentum takes hold.

• Volume oscillator: An interesting measure as it plots the relationship between two moving averages. This allows you to gauge which is the strongest between the two and which may help you place a Forex trade.

• Balance volume: Another measure which helps to predict a breakout, it works by showing the relationship, or lack of, between volume and movement in the price of a security. If there is a sudden increase in volume but no noticeable move in the price of the security, then the likelihood is that a sudden and strong directional move will occur. Balance volume helps identify this. 

Conclusion

There are other indicators, indeed one of the most famous, the Relative Strength Index (RSI) is worth being aware of. It can be applied to trading many different securities but also Forex trading. All indicators are useful, but a word of warning! Rubbish in - rubbish out... Although commonly used to describe that data being input into a model may be rubbish, giving you rubbish results, it can also be applied to indicators. You can use them to confirm trade ideas, but not necessarily rely on! Keep your wits about you when trading currency volatility by sticking to a disciplined approach and your trading plan!