Volume and Trend
Volume can give an indication of the health of a trend.
If the volume increases during the trend it is considered strong and volume decreases when the price moves against the trend. If the price is rising but the volume is falling the trend is likely to stop and reverse. This is because the smaller proportion of buyers will be overpowered by the sellers.
This is also true in a downtrend where the volume rises when the price moves with the trend and falls when against. If the volume decreases when the price moves down it is likely to reverse or fall at a slower pace.
Volume and Reversals
To understand the reason for the movement in volume before a trend reversal, traders need to know how the data is gathered. Forex is unlike the share market as there is no central exchange and it is traded Over the Counter OTC between market participants. To measure the volume, it looks at the no. of ticks/changes in price. 1 tick equals 1 volume. As price moves up and down the number of ticks are added up.
Volume and Breakouts
The volume indicator can be used to verify a breakout and stop you trading on false breakouts.
If the market is in a consolidation period with low volume, an increase in the volume can validate a breakout. is consolidating on a low volume, a sudden pick up in volume would signify that a breakout is due. If the volume is low during a breakout it may just be caused by a few market participants and could be false.
Volume is one of the most important pieces of data and is valuable when trading. The larger the volume the indication that there is a greater number of market participants. Any movement under high volume has significant weight and will normally come before or after large market moves.
When the volume is low, a smaller number of trades are needed to move the market and moves are less significant.
When a volume spike is extreme traders should look for clues from the price itself. Certain candles stick such as spinning tops/bottoms, dojis and stars have greater chances to become reversal areas.
Many of the individual spikes you see are caused by economic data releases and major political shifts. These can also be seen as false positives if the volume only lasts for a single day. If the volume carries on for multiple days a reversal could take place.