If you have been researching on trading strategies, you would have noticed that there are a number of pros who use volume as part of their strategy. This is logical because volume causes the surge in movement traders would like, to capture maximum gain in the shortest period of time. Volume strategies are particularly relevant for stocks trading since each stock exchange can comprehensively provide the exact volume data. Are volume strategies relevant for forex trading strategies then?
We posted this question to our friends working at forex.com, one of the largest forex brokerages out there. They told us that the volume data you see in your MT4 platforms are based on the number of trades done, on that particular server you are connected to. This means you will get a different volume data point depending on which broker you use, and which server you are connected to on that broker. Based on this volume data, volume indicators such as ?Force Index? are plotted.
Because forex trading is not under one centralized market, no one has access to an accurate volume data point. For this reason, some will tell you volume indicators are not accurate on MT4. We put this to the test by visually testing the ?Force Index? indicator and we found it to the useful. Whenever there is a surge in volume on the server we connect to, there is a stronger price movement.
We attribute this to the law of large numbers; when you have a significant number of traders connected to a broker server, the data point becomes statistically significant. There is also an element of the wisdom of crowds ? when there is a collective opinion on a currency?s price direction, there is stronger volume, and consequently stronger momentum in that direction. This is why it is important to use established forex brokers such as forex.com, because they have enough traders to provide significant volume data which can shape trading decisions.
Also note that this volume is not the dollar volume but simply the number of trades done by the traders logged onto the same server. So a $1m trade and a $1 trade will each be contributing 1 unit of volume to the MT4 data set, even though the former trade contributes more towards price action.
In conclusion, while v0lume data on MT4 is not as accurate as volume data provided by stock exchanges, our opinion is that the MT4 volume data, as well as volume indicators, can provide price action insight to forex traders. Don?t give up on volume trading strategies if you are reading up on those!
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This entry was posted in FX, Random Thoughts. Bookmark the permalink.Source: http://www.asiapacfinance.com/blog/2012/09/29/how-to-use-mt4-volume-indicators-and-data/
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