Some say that the volume indicator is the second most important index after the price itself. Truth be told, this indicator is much more useful in the Stocks market, because the volume movement is equal to the number of stocks being bought or sold at the moment. In Forex the picture is slightly different, because the market is decentralized and we cannot know for sure how much money is currently being bought or sold. In order to calculate the volume, the algorithm uses the changes in the price to generate the values of the volume indicator.
The volume indicator is a histogram with two types of bars: green and red. As you can probably guess, we have a green bar, when its value is greater than the value of the previous bar and the same logic is used with the red bar. The greater the values of the indicator, the more players are currently participating in the market.
We can directly use the volume indicator to determine the strength of the trend. If we have a trend, the price is following it (either downwards or upwards) and the Volume value is increasing, then we are safe to assume that the trend is strong and will hold. On the other hand, if the price is moving and the volume’s value is decreasing, we should understand that the trend is weak and it is unlikely to continue. This could be followed by either a sleepy market or a reversal, but you will have to call in additional indicators to confirm.
You can also use the volume indicator to sort out the valid breakouts. If you observe a consolidating market with low volume and then a sudden, single high bar in the indicator, this can point out that a breakout is about to happen anytime soon. Breakout that are happening, while the volume indicator has high values are more likely to be valid. However, if the indicator points low interest in the move, then it is most likely a fake breakout.On Balance Volume - OBV Money Flow Index - MFI Accumulation / Distribution - AD
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