Direct from the desk of Dane Williams
Specifically within forex markets, comprehending volume is no straightforward task.
This is primarily due to the absence of a centralised exchange.
You see, unlike say the centralised stock market, forex operates as a decentralised over-the-counter (OTC) product.
Consequently, the volume you encounter is derived solely from trading activity on a specific pair, within a given exchange at any given moment.
Effectively, what you’re getting is nothing more than single broker-provided data.
In traditional stock markets, volume represents the number of contracts or shares traded, therefore offering a clear indication of overall market activity.
However, when it comes to forex markets, it's a completely different story.
The volume data displayed on your broker’s trading platform is essentially a reflection of the cumulative trading activity specific to that platform.
It does NOT provide a comprehensive overview of the entire forex market.
This broker-specific volume data, while sometimes deemed valuable by traders using extremely niche trading strategies, can be subject to concerns about its reliability.
It is not uncommon for forex brokers to manipulate these figures, even unintentionally, resulting in volume fluctuations that may not accurately represent the actual market activity.
This raises questions about the wisdom of relying exclusively on this data for entry and exit decision-making in your strategy.
So as a retail trader, what's the prudent course of action you ask?
Is forex volume data really worthy of your attention?
My take is that it should be considered merely as one component of your analytical toolkit surrounding your trading strategy.
While forex volume can offer some contextual insights as part of any trading strategy, it would be really unwise to base the entirety of your trading decisions on this data alone.
Forex markets are not single stock exchange traded markets.
Instead, I’d encourage you to think of volume as a contributing factor to any entry or exit decision you make.
But not the sole determinant.
How can you use forex volume?
So how can you as a trade use forex volume in a useful way?
Well, even though there isn’t a single centralised exchange in the forex market, there are still some large brokers/exchanges that generate massive daily trading volumes.
With this being said, I’d encourage you to think of the data being presented to you as a snapshot of what the larger institutional players might be doing.
Keyword being might.
It’s statistically likely, but not necessarily correct on any particular move.
No matter how much volume is presented by the indicator, there’s no doubt that other traders are likely to interact with the market in similar areas.
Charts won't show all that institutional money entering the market at higher timeframes.
However, we will be able to make some trading decisions based on the general trend of volume.
If you want to be a consistently profitable trader, achieving success in forex trading necessitates the adept utilisation of various tools and techniques.
To sum up, relying solely on forex broker-provided volume data is not a prudent strategy in isolation.
Rather, it should be incorporated alongside other indicators, considered within the context of price action and supplemented with fundamental analysis to form well-informed trading decisions as part of your overall strategy.
Best of probabilities to you.