Why Are Volume and Volatility Important in the Forex Market?
The relation between volume as well as volatility always receives much attention from investors in the forex markets. In fact, studies have found that there exists a positive co-relation between volume levels as well volatility. But, the strength of this relationship is based on the financial instrument being used. Here, discover why are volume and volatility important in the forex market.
The Importance of Volume & Volatility
When it comes to trading in the forex markets, volume represents the amount of any financial asset that has been exchanged over a specific time period. Thus, by correlating the volume levels with the pricing data, traders can determine the overall sentiment of the market.
When traders know that heavy trading has been carried out within a specific time period then it could provide them with valuable information. Put simply, they can use it for filtering trade signals and look for strong trading volume on breakouts for instance. However, since forex market is decentralized, over the counter trading market. Therefore, there isn’t any single place where one could view the actual trading volume of any currency pair. But, by using the right set of tools, traders can utilize volume data for fine tuning their trading strategies.
Volatility, on the other hand, measures how drastically the prices of a market has changed. The liquidity levels of a market have had a huge impact on the volatility of the prices in the market. In other words, a less liquid market leads to a market being more volatile, thus causing prices to alter drastically. On the other hand, high liquidity results in less volatile conditions wherein prices never fluctuate drastically.