How to know volume on Forex - the best indicator of volume Volume Zone Oscillator
What is forex volume and how to measure it? What are the volume indicators for MT4? Why Volume Zone Oscillator is the best Forex volume indicator.
Hello, gentlemen, traders! Stock brokers know the importance of volume analysis. Volume, open interest and price are key components in trading decisions. But, unlike stocks and futures trading, Forex trading volume is rarely used. And there is a good reason for this. The foreign exchange market is a decentralized market where trading operations are carried out off-exchange. This means that there is no formula for the volume or method of tracking the number and size of contracts 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 Forex volume is measured, whether it is possible to 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 to measure volume on Forex?
Volume is like the air we breathe. Without volume it is impossible to make the right trading decision. Volume is what drives prices to move forward and creates trends. If you are a daily trader, a trend trader or a swing trader, you need the volume to see the price move. Without volume, we cannot make a profit. When there is no volume, we usually lose money. Therefore, it is important not to ignore forex volume analysis.
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 to measure volume on Forex? Unlike the stock market, we can only measure volume on Forex by counting tick movements. The volume indicator cannot measure how many contracts are sold on Forex, but it can calculate how many ticks the price moves up or down in any period of time. If the market has high trading activity, the number of ticks per second will increase, which indicates an increase in Forex volume. The formula of the Volume Oscillator indicator is based on the above principles.
Why is it important to use volume indicators on Forex?
Very few traders know how to use volume analysis to increase their profits and minimize losses. Many traders do not understand why volume analysis is a powerful tool. We can even distinguish several types of volume indicators on Forex, available on most trading platforms. But, oddly enough, most traders do not know how to use volume indicators to maximize their profits.
Volume is mainly useful because of its ability to draw attention to unusual purchases or sales. Price usually moves from periods of low volume activity to high volume activity. If you notice this intense trading activity, you can trade alongside large players.
High volumes of purchases and sales can generate trends and be catalysts for a change in trend direction. A volume analysis can help you see these trends before they are visible on the price chart itself.
Let's now determine 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 a family of indicator oscillators. Volume tracks purchases and sales over a period of time. Oscillator is a technical tool that takes the form of sine waves. These waves will change over time above and below the center line. The volume indicator is also very closely related to volatility.
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 sine wave line, expressed as a percentage. Volume Oscillator settings can be adjusted according to your trading needs.
Volume Oscillator indicator is calculated using the following formula:
Volume Oscillator = ((SMA 14 - SMA 28) / SMA 28) × 100.
Let's see further how to use volume to confirm price trends.
How to use the Volume Oscillator indicator?
The Volume Oscillator moves above and below the center line. Movement above the midline gives us a positive value. And movement 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.
Volume is above the center line when fast MA is above slow. And the volume is below the center line when the slow MA is higher than the fast.
How to confirm a trend using the Volume Oscillator indicator?
When a bull or bear 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 the weakness of the prevailing trend.
Volume Oscillator can also be used as a confirmation indicator.
We can use it to confirm the breakthrough 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 the trend and assessing the strength of the breakout.
Below we describe the most popular Forex volume indicators, and also 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 compiled 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 voluminous 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 most effective volume indicator for Forex trading? In our opinion, Volume Zone Oscillator (VZO) is the best indicator of volume that can be used in your trading analysis.
See also how to set indicators in MT4.
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 in the world of trading in 2009 by Walid Khalil and David Stekler. But it can be found on the most popular Forex trading platforms.
This volume-based indicator combines the other two Forex volume indicators:
- On Balance Volume (OBV);
- Money Flow Index (MFI).
In addition, the VZO indicator adds an exponential moving average to smooth 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. Extreme levels of the volume zone are -60% and + 60%. This is the limit of the range of the oscillator.
But between these zones we can identify more relevant volume zones that can generate buy and sell signals. However, volume cannot be used as an accurate entry and exit tool. It can be used only as a filter in combination with other indicators.
Below we describe a guide on how to trade with the Volume Zone Oscillator.
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How to use Volume Zone Oscillator?
Now you will learn how to interpret the signals of the VZO indicator.
Moving above the midline will give us a bullish signal, and moving 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 readings of the volume zone “+5” and “-5.
There are four main volume zones that you need to monitor:
- When the VZO rises above 5%, this marks the early phase of an uptrend. Conversely, when the VZO falls below -5%, this marks the 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 volume zone of -40%.
- 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, which can signal a bullish reversal.
Let's see what trading tactics we can use with the Volume Zone Oscillator.
But first, let's recall the basic principles of the Dow. During bullish trends, volume rises with rising prices. 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. VZO is located below the center line, signaling selling pressure. Indications of the volume zone from -5% to -40% also indicate a zone of a stable downtrend. When VZO recovers from -40 and does not reach the upper limit (> +40), this indicates that sellers are still in control.
The GBPUSD chart above shows how, during bearish trends, VZO tends to stay in the lower volume zone, fluctuating between 0 and -40.
This is a good method to determine the direction of a trend and trade by trend.
Want to know more about oscillators? Be sure to read the article on 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 it was a bullish trend, then you are right. Volume zones speak for themselves. We are located above the center line and move between +5 and +40 zones of volume, which means that we have an uptrend.
Now let's look at the big picture:
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With a little practice, you can learn to trade with the Volume Zone Oscillator. Remember that forex volume analysis should always be used in conjunction with price analysis. This will result in effective buy and sell signals. The volume indicator can highlight hidden strengths and weaknesses of a trend that is not visible to the naked eye.
Read also the article “What are Forex CFDs?”.