Maybe you believe that analysing how much a specific cryptocurrency is traded over a certain period is not worth the effort. If you do, that is not the right approach to crypto trading. In the competitive cryptocurrency market, every strength matters, including having a clear understanding of trade volume. In fact, it can provide several highly valuable insights. There are various indicators that examine this volume aspect from different angles. Let’s devote a few minutes to improve our knowledge about volume indicators.
1. Volume Indicators Explained
Volume indicators provide important insights into the changing trading volume over time. They help traders measure market sentiment, confirm trends and make informed decisions about buying or selling cryptocurrencies. They are valuable tools for assessing the health of the market. When prices are moving positively and the volume is rising, it indicates good health.
1.1. Volume Indicators: How To Analyse
Volume indicators measure the number of trades or the amount of cryptocurrency traded within a specified time frame. They provide several valuable insights. For instance, if Bitcoin’s price is increasing, and its trading volume is notably rising, it shows a strong uptrend. This data indicates increasing market interest, potentially signalling a prolonged price increase.
2. Impact of Volume on Price in Crypto Trading
There are mainly two ways to look at the impact of trading volume on cryptocurrency prices.
High trading volume signals active market participation, potentially driving price changes.
When today’s volume surpasses historical averages, it suggests increased interest in buying or selling. This can indicate urgency in market actions, which often influences price movements.
3. Popular Volume Indicators in Crypto Trading
Here are the popular volume indicators in crypto trading.
3.1. Money Flow Index (MFI)
Money Flow Index is one of the most popular indicators based on volume. MFI, ranging from 0 to 100, measures overbought or oversold conditions. Much like the Relative Strength Index, it indicates whether the market is becoming overheated. When MFI exceeds 80, it suggests a potential price reversal due to excessive buying volume. Conversely, a value of 20 or lower may indicate excessive selling volumes, signalling oversold conditions.
3.2. On Balance Volume (OBV)
On Balance Volume is a simple measure of volume changes correlated with price. To calculate OBV, begin with an arbitrary number (e.g., 100), and add volume to OBV on days when the price goes up, while subtracting it on down days. Rising OBV typically validates price trends.
The Momentum indicator evaluates the impact of volume on price movements. Increasing buying volume tends to drive crypto prices higher, signifying strong momentum. However, to sustain a trend, volume must remain robust. If prices rise on declining volume, it can signal a drop in momentum and a potential trend reversal. Similarly, falling prices on declining volume may indicate a shift in direction.
3.4. Accumulation/Distribution Line (ADL)
ADL, like OBV, considers accumulated volume. An upward ADL indicates an upward price trend as more traders buy the cryptocurrency. A downward ADL suggests a bear market. Divergence between ADL and price often signals an impending trend change.
3.5. Chaikin Oscillator
This measures ADL momentum by comparing two exponential moving averages of ADL. Highly positive values indicate strong buying pressure, while highly negative values suggest significant selling pressure. Changes in momentum often preceded trend changes.
3.6. Ease of Movement (EOM)
EOM oscillates between positive and negative values. High positive values signal price increases on low volumes, while highly negative values indicate price decreases on low volumes. Low volumes can hint at possible reversals, with the indicator’s moving average generating trading signals. EOM is often used alongside other technical indicators.
Volume indicators are very important in cryptocurrency markets. They help traders measure market sentiment and assess trends. High trading volume can indicate active participation and potentially drive price changes. Popular volume indicators like the Money Flow Index, On Balance Volume, Momentum, Accumulation/Distribution Line, Chikin Oscillator, and Ease of Movement, provide valuable insights into market dynamics. Understanding these indicators can help traders make informed decisions about buying or selling cryptos. Keep in mind that while volume indicators offer essential information, they are more effective when used in combination with other technical indicators for a comprehensive trading strategy.