How to know volume on Forex? The best indicator of volume for MT4
What is volume in Forex and how do I measure it? What are the volume indicators for MT4? Why Volume Zone Oscillator is the best Forex volume indicator.
Hello, dear traders! Stockbrokers know the importance of volume analysis. Volume, open interest, and price are key components in trading decisions. But unlike stock and futures trading, Forex volume is rarely used in trading. And there is a good reason for this. The currency market is a decentralized market where trading operations are carried out outside the exchange. This means that there is no formula for volume or method for tracking the number and size of contracts as in the stock market. However, there are volume indicators for MT4 that help the trader determine the approximate volume on Forex. In this article, you will learn how volume is measured in Forex, whether you can use volume analysis in the Forex market as in the stock market, and how to use the Volume Oscillator and Volume Zone Oscillator indicators to increase your profit.
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How do I measure volume in Forex?
Volume is like the air we breathe. Without volume, it is impossible to make the right trading decision. Volume is what makes prices move forward and creates trends. If you are a day trader, trend trader, or swing trader, you need volume to see the price move. Without volume, we can't make a profit. When there is no volume, we usually lose money. Thus, it is important not to ignore the volume analysis on Forex.
Best volume indicator
If we have a good volume indicator, we can avoid unnecessary losses. In the long run, this can be extremely important for making a good profit.
So, how do I measure volume in Forex? Unlike the stock market, we can only measure volume on Forex by counting tick movements. The volume indicator can't measure how many contracts are sold on Forex, but it can calculate how many ticks the price moves up or down in any time period. If the market has a high trading activity, the number of ticks per second will increase, which indicates an increase in the volume of Forex. The formula of the Volume Oscillator indicator is based on the above-mentioned principles.
Why is it important to use volume indicators in Forex?
Very few traders know how to use volume analysis to increase their profits and minimize losses. Many traders don't understand why volume analysis is a powerful tool. We can even identify several types of Forex volume indicators available on most trading platforms. But, oddly enough, most traders don't know how to use volume indicators to maximize their profits.
Volume is mostly useful because of its ability to draw attention to unusual purchases or sales. The price usually moves from periods of low-volume activity to high-volume activity. If you notice this heavy trading activity, you can trade alongside major players.
High volumes of purchases and sales can generate trends and be catalysts for changing the direction of the trend. Volume analysis can help you see these trends before they are visible on the price chart itself.
Let's now define what the Volume Oscillator indicator is and how to correctly interpret the information of this technical tool.
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What is the Volume Oscillator indicator?
Volume Oscillator is part of the family of oscillator indicators. Volume tracks purchases and sales over a period of time. An oscillator is a technical instrument that has the form of sine waves. These waves will change over time above and below the center line. The volume indicator soit is very closely related to volatility.
The oscillator measures volume as the difference between two moving averages:
- fast moving average, usually a 14-day period;
- a slow moving average, usually a 28-day period.
The difference between the two moving averages is then displayed as a sinusoid line, expressed as a percentage. The Volume Oscillator settings can be adjusted to suit your trading needs.
The Volume Oscillator indicator is calculated using the following formula:
Volume Oscillator = ((SMA 14 – SMA 28) / SMA 28) × 100.
Let's look further at how to use volume to confirm price trends.
How do I use the Volume Oscillator indicator?
The Volume Oscillator indicator moves above and below the center line. Moving above the midline gives us a positive value. And moving below the center line gives us a negative value.
We can extract the following information from the Volume Oscillator indicator:
- A positive value indicates a strong prevailing trend (bullish or bearish).
- A negative value indicates a weak market trend.
The volume is higher than the center line when the fast MA is higher than the slow ONE. And the volume is below the center line when the slow MA is higher than the fast ONE.
How can I confirm a trend using the Volume Oscillator indicator?
When a bullish or bearish trend is accompanied by an increase in volume, this is a sign of strength in the prevailing trend. However, if an uptrend or downtrend is accompanied by a decrease in volume activity, this is a sign of weakness in the prevailing trend.
Volume Oscillator can also be used as a confirmation indicator.
We can use it to confirm a breakout of support or resistance. For example, a breakout of resistance accompanied by an increase in volume indicates a strong movement. This is a great tool for detecting false breakouts.
Although no trading system is 100% reliable, this indicator is considered a good tool for confirming a trend and evaluating the strength of a breakout.
Below we will describe the most popular Forex volume indicators and explain why Volume Zone Oscillator is the best volume indicator in trading.
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Types of volume indicators for MT4
There are a huge number of volume indicators. Here we have collected the most commonly used types of Forex volume indicators:
- Price change rate (ROC);
- Mass Index Oscillator;
- Chaikin's cash flow (CMF) ;
- On Balance Volume (OBV);
- Money Flow Index (MFI);
- Volume Zone Oscillator (VZO);
- Percentage Volume Oscillator (PVO) and others.
ROC and PVO are purely volume indicators. For example, OBV compares closing prices and volume. While MFI and CMF compare closing prices, volume and price ranges.
Each indicator uses a slightly different volume oscillator formula, so your goal is to find the best volume indicator that matches your trading style.
What is the indicator the most effective to trade on the Forex market? In our opinion, the Volume Zone Oscillator (VZO) is the best volume indicator that you can use in your trading analysis.
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What is the Volume Zone Oscillator indicator?
Volume Zone Oscillator (VZO) is a technical indicator that analyzes the activity of purchases and sales in relation to certain price zones. The main idea of the VZO indicator is that the volume precedes the rise or fall of the price.
VZO is a relatively new indicator that was introduced to the trading world in 2009 by Walid Khalil and David Steckler. But it can be found on the most popular Forex trading platforms.
This volume-based indicator combines two other Forex volume indicators:
- On Balance Volume (OBV);
- Money Flow Index (MFI).
In addition, the VZO indicator adds an exponential moving average to smooth out volume readings. The resulting curve is then displayed in a separate window under the price chart.
Unlike other volume indicators, VZO moves between relative percentage levels. The extreme levels of the volume zone are -60% and + 60%. This is the limit of the oscillator's range.
But between these zones we can distinguishand there are more relevant volume zones that can generate buy and sell signals. However, volume cannot be used as an accurate input and output tool. It can only be used as a filter in combination with other indicators.
Below we will describe a guide on how to trade with the Volume Zone oscillator.
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How do I use Volume Zone Oscillator?
Now you will learn how to interpret the signals of the VZO indicator.
A move above the midline will give us a bullish signal, while a move below the midline will give us a bearish signal.
The most important volume zones: "+60", "+40", "0", "-40" and "-60". In addition, traders also use the "+5" and "-5" volume zone readings.
There are four main areas of the volume for which you need to follow:
- When the VZO rises above the 5% level, it marks the early phase of an uptrend. Conversely, when the VZO falls below the -5% level, it marks an early phase of the downtrend.
- Fluctuations between 5% and 40% mark a bullish trend zone. Conversely, a reading between volume areas from -5% to -40% indicates a bearish trend zone.
- An overbought signal is generated when we have readings above 40% of the volume zone. Conversely, an oversold signal is generated when we have readings below the -40% volume zone.
- A value above the 60% volume zone is an indicator of excessive overbought, which may signal a bearish reversal. While a value below the -60% zone is an indicator of excessive oversold conditions, which may signal a bullish reversal.
Let's see what kind of tradewe can use this tactic with the volume Zone Oscillator indicator.
But first, let's remember the basic principles of the Dow. During bullish trends, volume increases with price increases. The same is true in the opposite direction for bearish trends.
Let's look at the GBPUSD chart. We are in a strong bearish trend. The VZO is located below the center line, signaling sales pressure. Volume zone readings from -5% to -40% also indicate a stable downtrend zone. When the VZO recovers from -40 and does not reach the upper limit (> +40), this indicates that sellers are still in control of the situation.
The GBPUSD chart above shows how during bearish trends, VZO tends to stay in the lower volume zone, hovering between 0 and -40.
This is a good method for determining the direction of the trend and trading on the trend.
Want to learn more about oscillators? Be sure to read the article about the Stochastic Oscillator indicator.
Now let's see if you can determine the direction of the trend using only the VZO indicator without a chart?
If you said that this is a bullish trend, then you are right. The volume zones speak for themselves. We are above the center line and moving between the +5 and + 40 volume zones, which means that we are facing an uptrend.
Now let's look at the full picture:
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With a little practice, you can master trading using the Volume zone Oscillator indicator . Remember that analysis Forex trading should always be used in conjunction with price analysis. This will lead to effective buy and sell signals. The volume indicator can highlight hidden strengths and weaknesses of a trend that are not visible to the naked eye.
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