Volume is one of the most important indicator in financial markets. This is true especially with stock markets, where volume data are easily available. A feasibility that does not exist in forex markets, as they are highly decentralized, unlike the stock markets, which are strongly centralized. Many wide differences in the volume data provided by one broker rather than another complicate the problem.
In any case, volume tells a trader whether investors are buying or selling and by how much.
Volume helps a trader to detect market reversals and can tell him if the reversal candlestick is a ‘true’ candlestick. An example can be the creation of a hammer candlestick near the end of a downtrend. A hammer candlestick coming out on high volume in a downtrend can be a great signal when accompanied with another indicator, like the RSI. In a very large hammer candlestick, when the volume column is massive and definitely above the average volume, RSI may signal an oversold. A great opportunity for going long.
Candlesticks must always be read together with volume because they tell a trader what is happening to move price, while volume how hard buyers and sellers are battling. Analysis of volume often validates price and candlesticks that close at or near an important high or low should be observed very keenly for how much volume was involved.
What is the meaning of the presence of high volume near highs and lows? Volume can provide traders a clear, early warning that a current trend (long term or short term) may be coming to an end. If a price moves lower, but volume starts to increase and become greater than a 20 to 30-period average, then a trader may be looking at the bottom of a move. In other words, the market may reverse and become bullish.
When price is declining in a downtrend, this hints that no one is interested in buying or supporting higher prices. As prices continue to touch new lows, the volume begins to spike higher, well above the most recent candlesticks volume. This increase in volume indicates more participation and is generally a combination of new entrants on the buy-side, and those current traders who are on the sell-side who have to cover their positions and going long. The volume becomes a powerful variable that reverses the price action.