Get Wise to the Health of the Trend with the Forex MetaTrader 4 Volumes Indicator
Reading time: 9 minutes
This article will describe why the health of trends is an important aspect of trading that professional traders need to follow. It will explore the Forex MetaTrader 4 Volumes Indicator, how to trade with the volumes indicator, how to use volumes with other indicators, and more!
For traders in the stock market, looking at volume is a natural step after looking at price. It can reveal all sorts of useful information that you can't discern from price alone. For example, larger volumes suggest higher levels of interest, and a greater number of participants. Much like momentum, this can help clue you in on how much strength lies behind a price move.
Similarly, low trading volumes tend to indicate fewer participants, and lower levels of interest in the instrument in question. Low volumes may, therefore, reveal weakness behind a price move. These ideas are some of the basic building blocks of volume trading strategy. So you can see the value in taking the trouble to look at trading volumes. With stocks the data is easy to come by — stocks are exchange traded, and every time a trade goes through, it is reported and published for all to see.
However, there's a catch when it comes to getting hold of this data for Forex. The decentralised, 'Over-the-counter' (OTC) nature of the Forex markets means that a precise overview of such information is unavailable. The large banks that make up the interbank market at the core of global FX trading tend to closely guard their own trading volumes as proprietary information — and even they will not be privy to the overall picture.
So what can we do if we want to use volume to trade?
Since we cannot use actual volume figures for Forex trades, we need to use a proxy for volume instead. The number of ticks within a bar is the yardstick that is conventionally used to assign a value for Forex volume. So really, volume-based indicators for Forex should be more properly referred to as ' tick volume indicators'. As you can imagine, trying to count the number of ticks occurring within each bar would be a nightmare as a manual task.
The good news is that with all the free-to-use, high-quality trading software available to us, we don't have to calculate anything manually. Even better, there is a Metatrader 4 (MT4) volume indicator that comes as part of MetaTrader 4's standard indicator package. So let's take a look at the tick volume indicator in MT4:
Volumes Indicator MT4
You'll find that the standard indicators that come with the MetaTrader 4 are broadly divided into four categories in the platform. These are:
Naturally, it's the 'Volumes' folder in MT4's navigator that we're interested in:
Source: MetaTrader 4 - Volumes Folder
As you can see from the image above, there is more than one volume indicator available. The 'Volumes' indicator is the one we're interested in, as it purely concerns itself with tick volume. The others utilise volume as part of their calculations. But if we are solely focussed on volume, then the best volume indicator is the one selected in the image.
The indicator could not be more simple to use. When you launch it, there are no variables to set; simply click 'OK' and the Forex volume indicator appears as a separate chart beneath your main one. In the image below, we have applied the volumes indicator to an hourly USDCAD chart as an example:
Source: USD/CAD Hourly chart - MetaTrader 4 - Data Range: 22 Mar, 2017 - 29 Mar, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
As the image shows, the Forex volumes indicator in MT4 uses two colours. A green bar indicates that the volume was greater for that candle than the volume of the previous one. Conversely, a red bar indicates a lower volume compared with the previous candle. If you prefer other colours, you can easily configure the bars to colours of your choosing, by altering the parameters of the indicator.
Source: MetaTrader 4 - Volumes
Trading with the MT4 volumes Indicator
Volume can reveal information about how much strength remains in a trend. Volume trading is therefore fairly similar to momentum trading. If volumes remain high (or increase) as prices move in the direction of the trend, we can infer that the trend is in good health. If volumes decrease as the price continues in the direction of the trend, it suggests that the trend is running out of steam. A volume trader might expect the trend to break down sometime soon in such a circumstance, and may position their account accordingly.
So we can use the volumes indicator to perform a kind of validation check on price moves. If volumes are high at such times, the moves would appear to be sustainable. If volumes are low, we should be sceptical about such a move, and suspect it may be susceptible to a reversal. Consider the downward move between the two dotted lines in the hourly GBPUSD chart example featured below:
Source: GBP/USD Hourly Chart - MetaTrader 4 - Data Range: 28 Mar, 2017 - 30 Mar, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Notice how the volume is not increasing as this move progresses? Instead, we are seeing plenty of red bars, and the volume eases off as the price drops. This would provide little confidence to traders in terms of this being a sustainable downward move. If we look further on, we can see that the price did indeed subsequently recover thereafter:
Source: GBP/USD Hourly Chart - MetaTrader 4 - Data Range: 27 Mar, 2017 - 3 Apr, 2017 - Please Note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
Does it Actually Work?
In answering this question, it is important to bear in mind one of the earlier points from this article. Namely, that the indicator does not truly represent actual volumes of trades in the market. Even with this caveat, however, there are reasons to believe it to be a sensible yardstick by which to measure by.
For example, over key news releases, where we would expect volumes to be higher, the volumes indicator consistently reflects such behaviour. Furthermore, the self-fulfilling nature of technical analysis also lends credence to this method. A sufficiently large number of people look at these values regularly, and put stock in what they are saying as to influence market behaviour.
Using Volumes with Other Indicators
You are likely to find that you can enhance the effectiveness of the volumes indicator if you use it in combination with a complementary indicator. For example, you might use the Keltner channel indicator to suggest possible breakout levels, and may then validate these using volume as a guide. Keltner channels are a type of volatility envelope, widening as prices become more choppy, and narrowing in quiet trading times.
If the price breaks out of the envelope, it may indicate the start of a new trend. A common drawback of such trend-following methods is that they generate frequent false signals, and only infrequently signify a true trend. Using the volumes indicator, we may be able to filter out some of those tricky false signals. The Keltner channels indicator is one of the extra tools you gain access to when you download the MetaTrader 4 Supreme Edition plugin (MT4SE).
MT4SE is a custom plugin, specially designed by industry professionals to give you a more cutting-edge selection of trading tools than you get with the standard MT4 download. Of course, using Keltner Channels in combination with the MT4 volumes indicator is just an example to illustrate the point. You may well discover a superior mix of indicators for yourself. The best way to find this out is through experimentation.
This kind of trial and error can be expensive with real money, though — which is why it's useful to have a risk-free environment to trade in, such as with our demo trading account. The live prices are real, and the tools are fully functional, but you aren't using real money, and are instead trading with virtual funds. See what works best for you first, so you will be confident in your approach when you trade in the live markets.
As we have seen, in contrast to many indicators, Forex volumes do not concern themselves with price levels at all, and instead look at the number of ticks in a bar. Because so many other indicators do look at price, it is easy to find a complementary indicator — one that has a sufficiently different methodology, to avoid looking at the same aspect of the market twice over. We hope this has been a useful rundown of the volumes indicator in MT4, and we hope that it helps you on your way to a fruitful trading experience.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.