Understanding Forex price movement with volume is crucial to every trader. The knowledge will help them to trade with care and make wise trading decisions.
However, understanding this important concept isn’t a mean feat. This article gives an insight into how you can understand forex price movement with volume and trade like a pro.
Understanding Trading Volume
Volume is defined in the foreign exchange market as the number of a currency pair traded. A lot is usually 100,000 units of the given currency. This knowledge can come in handy for traders in determining a trend’s strength.
When a currency pair records high volume, the market is considered as gathering strength as an increasing number of traders engage in trading the pair. The increased transactions or deals performed on this pair will have a positive impact on the capital.
It should be noted, though, that not all upward moves indicate a bearish market for traders to leverage for better trading. A forex pair may reach new highs but not bearish if its volume decreases consistently.
This may indicate that fewer people are trading the pair and the poor number of traders may result in pullbacks and eventually, reversal. Traders may stay clear of such a currency pair.
A currency pair with increasing volume may have a downward momentum building up that may make experienced traders turn bearish on the given pair. Conversely, a downward move accompanied by decreasing volumes may signify a weakening trend. The currency pair may reverse, accept a consolidation, or begin an upward trend again.
This implies that understanding price movement is crucial to your success as a Forex trader. The volume knowledge, alongside the traders’ experience and skills, is a powerful market determinant.
A trader can detect potential reversal points and trend strength only if they understand trading volumes with the aid of Heikin Ashi Candles. However, using this knowledge in isolation may lead to misleading results and wrong conclusions because several other factors may influence price movement.
Other Factors that Affect Price Movement
Other important factors to consider are:
- Inflation: A country’s monetary policy is affected by several factors that include the price of goods and services. Rising interest rates may affect exchange rates, which in turn, will affect the Forex market.
- Trade and capital balances: The Forex market is an international market that is affected by the volume of trade or money flowing through a country. Depending on the volume, the currency may appreciate or depreciate significantly. A good cash flow is indicative of an investment-worthy currency while it’s the other way around if more investors are moving their money out of the country.
- Interest rates: Interest rate is one of the most influential factors in the Forex market. A currency’s strength depends on the interest rates. The higher the interest rates, the stronger the currency.
Higher interest rates may attract more investors to invest their money in the currency, hoping to enjoy the high interest rates. Such a currency will automatically experience increasing demand and may affect its value in the Forex market.
- Government policies: Although economic data plays a major role in influencing Forex price movement, the importance of government policies can’t be overemphasised. The political landscape which may birth several policies may either go in favour of or against the Forex market. International relations, government politics, and unrest in the political arenas play a major role here.
Traders do well to consider these indicators together with volume for the best result. Otherwise, they may make wrong trading decisions that may cost them their capital.