When trading Forex, trading volume is a critical piece of information to have when you are looking for a reversal in the market or just a continuation. If you can see but not interpret it, it is still worth knowing what the volume of your market is indicating.
The first thing to understand about volume and its relationship to price movement is that it records the amount of activity at a given price. Volume in trading is important because it reflects the buying and selling pressure in the market.
Buyers are likely to show up when there is little demand for an instrument at one price level but increased supply which causes that price level to be tested again and again without much movement above or below it. The same can be said for selling; when there is an imbalance in supply and demand at a given price level, then that price becomes compressed into a tight range which will indicate low volume or no movement.
The second thing to understand about volume is how this activity affects the overall trend of your market. Generally speaking, the higher the volatility of your market, the more volume you will see. This is because there is a greater chance for price movements to go against the prevailing trend.
When price begins to fall, there is likely to be an increase in demand causing prices to test recent highs and having buyers step in at these levels. The downside is that it also means that there will be increased supply since these are resistance levels; this causes prices to struggle or not move much either side of such a resistance level.
The same can be said for the bullish trend; with greater supply, there is likely to be lower prices. However, these are rejected again at recent resistance levels where buyers step in and push prices higher into a tight trading range.
