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Volume and Reversals

Forex volume cannot be evaluated exactly as in the Equity market, where every share equals to one volume so that selling 200 shares is 200 in volume. In the forex market the number of contracts and their size is unknown because the market is wide and decentralized. Therefore to evaluate volume in Forex the number of ticks(changes in price is used). One tick equals to one unit of the forex volume. As it moves up and down volume adds up.

An increase in volume means that lots of participants are actively selling and buying currencies.

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When volume spikes at certain price level, forex traders know that there was lots of interest shown by traders to that price level. In turn it means that this particular level is an important one.

The simple observation of the forex volume makes it possible to find important support and resistance levels, which may be significant in the future.

If the volume spikes are distinctively extreme (larger than historical spikes around) forex traders should look for clues from the price itself. Candles that have a narrow range, spinning tops/bottoms, dojies, stars, other candles with extremely large tails have highest chances to become the price turning points.

Single volume spikes only bring price to a halt. A lot of stand-alone average volume spikes occur during fundamental economic announcements on daily basis. News can cause spike in volume for a single day and then volume disappears again.

Reversals, however, happen not over one day but a series of days. If higher than average volume stays on the market for several days a huge volume spike (volume climax) may follow which could indicate a point of market reversal.

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Read also Advanced Forex