Is the volume analysis in forex trading really useful? This old question is still open, as there are still many doubts on if the volume is a reliable variable on which a trader can count in his daily activity. Prices transparency in forex markets and de facto volumes are not as important as in the stock markets, for many reasons. First, unlike stock markets, forex markets are very decentralized. As a consequence, volumes differ from one broker to another, since there is not a single exchange on which all currencies are traded. Secondly, the only volumes that matter are streaming via EBS or Reuters. Furthermore, tick-based volumes and volumes coming from future exchanges are not considered “true” volumes.
There are two ways a trader can use to look at forex volumes: the total executed and execution on bid/ask spread.
The former is generally used by beginners. Graphically, volumes are plotted on the x axis, while volume profile on the y axis. Total executed volume, for trading goals, is most commonly used in a relative sense, as traders are not looking at the number of finalized executions per se (e.g. number of contracts traded), but they are rather interested in comparing the executed volume on one bar to another. This difference matters, because what may be considered high volume on one day could not be considered high volume on another. But for intraday trading goals, high volume bars are the difference between an imminent reversal or just an average bar in a trend.
The latter is also known as depth of market, or simply as liquidity, and displays resting orders. Executions on the bid/ask can be plotted independently of price, and the net difference between the bid and ask at any price is called “delta”. They are used to detect how market participants, especially the biggest ones, are moving on the market. In other words, they are useful to capture the market direction and to understand if prices are going up or down. Liquidity can be used in many ways, the most common of which is known as the shape of the order book (i.e., the number of executions on each price step and how far away price steps are from each other). In theory, if the bids to offers ratio is high, prices should increase, although empircal evidence has not showed clearcut results on this general rule.