A Volume Indicator helps you pinpoint entry & exit points on a forex chart.
When the volume bars are green it indicates traders are staying in the market & buying. The taller the red volume bar, the higher the number of traders still in the market.
When the volume bars are red, it indicates traders are selling & leaving the market with their profits/losses. The taller the red volume bar, the higher the number of traders who are exiting.
How to Use a Volume Indicator in Forex
When reading a volume indicator in forex, the crosshair selection tool should be used to connect candles to the relevant volume bars for precision.
Volume must confirm trend: When the market is trending upwards, volume must also be high (Dows Theory) so if you notice tall red candles in an upward trend, then the trend may be about to die out.
If you notice a red candle with a long green volume bar underneath, it means that although the candle is bearish, there was a lot of upward pressure during the period so the next candle to form is likely going to be a green candle.
If you see a small green candle with a large red volume bar beneath, it means although the candle is bullish, the downward pressure is significant so the next candle to form may be a bearish/red candle.
Another tip for reading volume indicators in forex is that even if you see tall green volume bars signifying buying opportunity, you should not buy till the candles in the chart touch an area of value such as a Resistance or Support line, Fibonacci line, etc.
The limitation of the volume indicator is that although it shows you the volume it does not point out areas of value on the charts so you must always combine it with another indicator.
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