Guide to volume indicators in Forex trading

Trading volume is an essential metric provided by exchanges or brokers of different asset classes. Monitoring how volume fluctuates on the market gives traders a great insight into the present market conditions and possible trend formations and reversals. Increase in volume indicates that the asset is interesting for traders. Volume is an energy that moves prices.

Volume is calculated differently in Forex than in Stock exchanges. Forex market is decentralized, which means that you can trade currencies in various markets simultaneously. Consequently, calculating the exact number of total contracts become impossible.

Forex traders have access to a variety of volume indicators. Volume indicators in FX trading measure increase in trading activity. And they can be an effective tool in measuring the strength of bull and bear trends. Traders use them to confirm or reject trading signals. In this Forex volume indicators guide, we’ll discuss what is volume and how to use some of the most important volume indicators in FX trading.

Core features of volume indicators

• Volume is the total amount of an asset traded at a given period of time
• Volume indicators in Forex measure rise in trading activity
• When FX trading volume indicators show an increase, while the market is trending, this is a signal that the trend will continue
• Volume and price are not always positively correlated, and increases in volume do not always mean an increase in price. If prices are in a downtrend, an increase in volume is a signal that the downtrend will continue
• Forex trading volume indicators can measure the strength of bullish and bearish trends on the market
• FX volume indicators can predict pattern completions. As increase in volume often means that a significant level will be breached
• Volume shows liquidity on the market, which is especially important for day traders.

High vs Low volume

Before diving deeper into specific volume indicators and their application in Forex, traders must first have a firm grasp of what high and low volumes show on the market.

High trading volume indicates a high degree of interest in an asset and the presence of both buyers and sellers. Volume is not tied to either buying or selling amounts, but the sum of all trading activity related to a specific asset.

Higher trading volume also shows increased liquidity on the market, which is especially essential for Forex day traders, as high liquidity means lower spreads. Tight spreads are critical for constructing reliable trading strategies.

Low trading volume indicates little interest from the market towards a particular asset.

Low volume also means lower liquidity and wider spreads, which can be a dealbreaker for many traders.

When prices near pattern completion or close to breakout level, a drop in volume indicates that the completion or breakout will not happen. There’s simply not enough energy for that to happen.

On-Balance Volume (OBV)

On-balance volume, or OBV, is a commonly used leading indicator that relies on trading volume figures to predict future price movements. The indicator calculates buying and selling pressures by summing up volume on up days and subtracting the volume on down days.

OBV definition and core features

• OBV is used as a trader sentiment indicator and can show possible bullish or bearish runs on the market
• When the price and OBV are reaching higher peaks and higher lows, it is likely that an upward trend will continue
• When the price and OBV are reaching lower lows and lower highs, it is likely that a downward trend will continue
• The OBV indicator is placed below the price chart
• Traders often use 1-hour timeframes when applying on-balance volumes to a chart
• Basic trendlines are commonly used alongside OBV – with trendlines showing support and resistance levels and OBV showing reversals

OBV calculation

OBV does not require much calculation and its values depend on the closing prices of an asset. The day’s volume is added to a cumulative total when the price closes in the green, and subtracting the day’s volume when the price closes in the red:

• If today’s closing price exceeds yesterday’s closing price – OBV = yesterday’s OBV + today’s volume
• If today’s closing price is less than yesterday’s closing price – OBV = yesterday’s OBV – today’s volume
• If today’s closing price is equal to yesterday’s closing price – OBV remains unchanged

OBV example in forex

We can visualize how the OBV works by plotting the indicator below the EUR/USD 1-hour chart.

Here are a few key scenarios traders need to be aware of when analyzing OBV in relation to a price chart:

• When the price and OBV are moving in the same direction, this indicates that the upward/downward trend is likely to persist
• When the price is trading sideways, but OBV is falling or rising, a breakout is likely to happen toward the same direction as the OBV
• When the price is reaching higher highs, but the OBV is not, this is called a negative divergence and the trend is likely to reverse
• When the price is making lower lows, but the OBV is not, this is called a positive divergence and the trend is likely to reverse

Volume RSI

Volume RSI is similar to the regular relative strength index (RSI), with the difference being that volume RSI uses up and down volumes in calculation, rather than price movements.

Volume RSI definition and core features

• The volume RSI shows the relation between traded volume and up and down price movements by measuring which volume is stronger
• Volume RSI uses a value of 0-100 to measure the strength of the direction of volume on the market
• The value of 50 is also known as the centerline and is an important crossover point
• Volume RSI is plotted below the price chart
• A 14-period timeframe is the standard setting for volume RSI
• Volume RSI above 50 shows that bullish volume is higher than bearish volume
• Volume RSI below 50 shows that bullish volume is lower than bearish volume

Volume RSI calculation

To calculate the volume RSI, we must first find the volume relative strength, or VoRS:

VoRS = (Average up-volume) / (Average down-volume)

VoRSI = 100–100/(1 + VoRS)

We can also use the simplified formula for volume RSI:

VoRSI = Up volume / (Up volume + Down volume) * 100

Volume RSI example in forex

To better understand how the volume RSI works in forex trading, let’s look at an example of the EUR/USD pair with the VoRSI plotted below the price chart.

The chart shows the relative strength of the trading volume for the EUR/USD pair. When the VoRSI goes above the centerline, this indicates a higher bullish volume, while the opposite is true when the VoRSI dips below the centerline.

Generally, traders are advised to buy when the VoRSI crosses the centerline from below and sell when the VoRSI crosses the centerline from above.

Volume Price Trend (VPT)

The volume price trend, or VPT, is an indicator that measures the price direction and strength of price change of an asset. The VPT consists of a cumulative volume line, which adds or subtracts the percentage changes in the current volume and price trend of an asset.

VPT definition and core features

• The VPT is used to determine the supply and demand balance of an asset
• Price trend changes show the relative supply/demand of an asset, while volume shows the driving force of the trend
• The VPT is plotted below the price chart
• An increase in price and volume is used to confirm an uptrend
• A decrease in price and volume is used to confirm a downtrend
• When price increases, but the volume trend does not, this suggests a negative divergence and a weak downward price trend, which could reverse
• When price decreases, but the volume trend does not, this suggests a positive divergence and a weak upward price trend, which could reverse

VPT calculation

VPT is similar to OBV in many ways. However, the VPT indicator moves based on the percentage price shifts.

The formula for calculating VPT is as follows:

VPT = previous VPT + Volume x (today’s closing price – previous closing price) / previous closing price.

VPT example in forex

To better understand how the volume price trend works in forex, let’s look at an example of the VPT plotted below the GBP/USD price chart.

The GBP/USD price chart shows the areas where the volume price trend confirms and/or invalidates trends, as well as divergence points, which are marked on the indicator line below.

As evident by the chart, the VPT is a highly volatile indicator that can experience divergences multiple times a session.

Money Flow Index (MFI)

The money flow index, or MFI, is a volume and momentum indicator that uses time and price to measure buying and selling pressure over an asset.

MFI definition and core features

• The MFI is used to generate overbought and oversold signals based on price and volume
• The MFI is a leading indicator that assigns a value of 0 to 100 to an asset based on price and volume
• The indicator is plotted below the price chart
• MFI above 80 is considered as overbought, while MFI below 20 is considered as oversold
• The MFI represents a volume-weighted alternative to the relative strength index (RSI)
• A divergence between price and indicator may represent a reversal in price

MFI calculation

To calculate the money flow index, let’s look at the formula:

MFI = 100–100 / 1 + Money Flow Ratio

Where:

Money Flow Ratio = 14-period positive money flow / 14-period negative money flow

Raw Money Flow = Typical Price * Volume

Typical Price = (High + Low + Close) / 3

How to calculate the MFI:

• Find the typical price for each of the last 14 periods
• Note whether the typical price was higher or lower compared to the previous period to find whether the raw money flow was positive or negative
• Find the raw money flow by multiplying the typical price by the period’s volume. Use positive or negative values depending on whether the period closed in the green or red
• Find the money flow ratio by adding up the positive money flows over 14 periods and divide the sum by the sum of the negative money flows over the same 14 periods
• Find the MFI as outlined in step four
• Continue doing the same after each period ends, using only the data from the past 14 periods

MFI example in forex

To get a better understanding of how the MFI works in practice, let’s look at the index plotted below the GBP/USD price chart.

The MFI clearly shows where the pair is oversold and overbought. Traders can use this in conjunction with divergence and crossovers to identify entry and exit points on the market and make profitable trades. In this sense, the MFI is rather similar to the relative strength index (RSI), with the key difference being that the MFI is a volume-weighted index.

Ease of movement (EOM)

Ease of movement, or EOM, is an indicator that shows the relationship between price and volume and quantifies the two into a singular value.

EOM definition and core features

• The EOM shows how easily the price can move in either direction based on momentum
• Traders can use the period when the price moves easily for as long as the momentum lasts
• A 14-period timeframe is typical for EOM
• The EOM is plotted below the price chart
• EOM consists of a simple moving average and a center value of 0
• The middle value of 0 is the threshold for traders to go long or short based on volume data

EOM calculation

To find EOM, let’s look at the calculation steps:

Distance Moved = ((High + Low) / 2 – (PH + PL)/2))

Box Ratio = (Volume / Scale) / (High – Low)

1-Period EMV = Distance Moved / Box Ratio

14-Period EOM = 14-Period SMA of 1-Period EMV

Where:

PH = Prior High

PL = Prior Low

EOM example in forex

Let’s look at an example of the EOM plotted below the GBP/USD price chart.

The EOM shows a relatively stable momentum on the GBP/USD, which may indicate that no major trading activity that would be considered uncharacteristic was evident for the pair in the short term. A sudden drop on November 7 could mean that the buying pressure had subsided at that specific point on the chart.

Negative volume index (NVI)

The negative volume index, or NVI, is a technical indicator that shows the effect of low-volume sessions on price movements. NVI is used to track the movements of institutional smart money.

NVI definition and core features

• The NVI is a combination of price and volume
• NVI trendlines are often used to track the movements of smart money
• NVI is often used alongside the positive volume index, or PVI
• NVI is plotted below the price chart
• The indicator operates on the assumption that smart money is deployed when volumes are low

NVI calculation

To calculate the NVI, let’s look at the formula:

NVI(t) = (P(t) – P(t-1)) / P(t-1) x NVI(t-1)

Where:

NVI(t) = Negative volume index at time t

P(t) = Price/index level at time t

NVI(t-1) = Negative volume index at a prior period to t

P(t-1) = Price/index level at a prior period to t

Such calculation is applicable to all other periods. The typical number of periods used for the negative volume index is 14.

NVI example in forex

To get a better understanding of how NVI works in forex, let’s look at Forex volume indicators example below.

The negative volume index is followed by a trendline (in blue), which can indicate periods when smart money is more likely to enter the market. One such period could be at points where the trendline crosses the NVI from below. When it crosses over the NVI, it is considered to be a lesser likelihood of smart money becoming active, as volume is not yet low enough.

FAQs on volume indicators in forex

Do volume indicators really work in forex?

Volume indicators can help traders understand how changes in trading volume can affect their positions and the price of assets. While volume indicators alone might not be enough to construct a profitable trading strategy, they can certainly be useful in deciding when to place trades on the FX market.

Which are the best volume indicators for FX traders?

Some of the most widely used volume indicators are the money flow index, negative volume index, ease of movement indicator, volume price trend, etc. These indicators can be placed on different time frames and are used in various trading strategies.

Are volume indicators useful for traders?

Volume indicators can be effective tools for traders as long as they are used alongside other technical indicators, such as momentum indicators, or oscillators. Volume is helpful for many intraday traders, as volume indicates the degree to which traders are interested in a given asset. It’s worth mentioning that some successful traders do not use volume indicators.