📊 What is Volume Analysis?
Introduction to Volume Analysis
Volume analysis helps traders understand the strength behind price movements. High volume confirms moves, while low volume suggests weak moves that may reverse.
Why Use Volume Analysis?
- Confirm Breakouts: High volume validates breakouts
- Identify Trends: Increasing volume confirms trends
- Spot Reversals: Volume divergence signals reversals
- Validate Signals: Confirms other indicators
- Market Strength: Shows real participation
Understanding Volume in Forex
Tick Volume vs Real Volume
Tick Volume:
- Number of price changes
- Not actual traded volume
- Proxy for market activity
- Available on most platforms
Real Volume:
- Actual traded volume
- Only available from broker
- More accurate but less common
Volume Indicators
- Volume Bars: Visual representation
- On-Balance Volume (OBV): Cumulative volume
- Volume Moving Average: Smoothed volume
- Volume Profile: Volume at price levels
Volume Analysis Strategies
Strategy 1: Volume Confirmation
Breakout Confirmation
- Price Breaks Level: Support/resistance broken
- Check Volume: Higher than average?
- High Volume: Validates breakout
- Low Volume: Likely false breakout
- Enter: Only on high volume breakouts
Trend Confirmation
- Identify Trend: Price direction
- Check Volume: Increasing with trend?
- Increasing Volume: Strong trend
- Decreasing Volume: Weak trend
- Enter: Only with volume confirmation
Strategy 2: Volume Divergence
Bearish Divergence
- Price: Makes higher high
- Volume: Makes lower high
- Signal: Trend weakening, potential reversal
Bullish Divergence
- Price: Makes lower low
- Volume: Makes higher low
- Signal: Selling pressure decreasing
Strategy 3: Volume Clusters
What are Clusters?
- High volume at specific price levels
- Indicates strong support/resistance
- Price often returns to these levels
How to Trade:
- Identify volume clusters
- Use as support/resistance
- Enter on bounces from clusters
- Target: Next cluster level
Best Timeframes for Volume Analysis
Day Trading
- Primary: M15, H1
- Volume: Tick volume or OBV
Swing Trading
- Primary: H4, D1
- Volume: Cumulative volume indicators
Combining Volume with Other Tools
Volume + Price Action
Combination:
- High volume + Breakout = Strong signal
- Low volume + Breakout = Weak signal (false breakout)
Volume + Indicators
Combination:
Volume + Support/Resistance
Combination:
- High volume at support/resistance = Strong level
- Low volume at level = Weak level
Common Volume Analysis Mistakes
- Ignoring Volume: Trading without volume check
- Wrong Interpretation: Not understanding volume patterns
- No Context: Not considering market conditions
- Tick Volume Issues: Assuming tick = real volume
- Over-reliance: Using only volume
Volume Analysis Checklist
Before trading with volume:
- [ ] Volume data available (tick or real)
- [ ] Volume pattern identified (high/low/increasing/decreasing)
- [ ] Volume confirms price action
- [ ] No volume divergence (if trend trading)
- [ ] Volume at key levels (support/resistance)
- [ ] Stop loss set
- [ ] Risk/reward ratio at least 1:2
- [ ] Position size calculated using risk management rules
Advanced Volume Techniques
Volume Profile
What is Volume Profile?
- Shows volume at each price level
- Identifies high-volume nodes (support/resistance)
- Helps find value areas
How to Use:
- Trade from low volume to high volume
- High volume nodes = Strong levels
- Low volume nodes = Weak levels
On-Balance Volume (OBV)
What is OBV?
- Cumulative volume indicator
- Adds volume on up days, subtracts on down days
- Shows accumulation/distribution
Trading Signals:
- OBV rising = Accumulation (bullish)
- OBV falling = Distribution (bearish)
- OBV divergence = Reversal signal
When Volume Analysis Works Best
Ideal Conditions
- Breakout Trading: Confirms breakouts
- Trend Following: Confirms trend strength
- At Key Levels: Validates support/resistance
- With Other Analysis: Combines well
Limitations
- Forex Volume: Not centralized like stocks
- Tick Volume: Proxy, not real volume
- Broker Dependent: Varies by broker
- Not Always Available: Some platforms lack volume
Summary
Volume analysis is a valuable tool for confirming price movements and validating trading signals. While forex volume data has limitations, tick volume and volume indicators can still provide useful insights when combined with other technical analysis tools.
Key Takeaways:
- High volume confirms moves
- Low volume suggests weak moves
- Volume divergence signals reversals
- Use to confirm breakouts and trends
- Combine with other analysis
- Understand limitations in forex