If you are interested in cryptocurrency trading, it will surely be useful for you, to learn more about the basic signals and tools for understanding cryptocurrency price patterns.
Of course, cryptocurrency trading is more than just buying and selling different digital assets. If you really want to make profit out of it, and we believe you do, you should learn more about one fundamental influence of price - volume.
What is volume?
Why is it important?
What are its drawbacks?
Which are the most common volume indicators?
Those are the questions we are answering today.
What does crypto trading volume mean?
Cryptocurrency trading volume refers to how much a given cryptocurrency has traded, over a given period of time. Although trading volume may seem similar to liquidity, these are two different metrics. While volume is the sum of all trades, liquidity is the actual amount available for trade. Of course, there is a correlation between the two metrics.
Furthermore, the total trading volume for a cryptocurrency is related to its volatility. We already know that cryptocurrencies are volatile, as their adoption path is uncertain.
So, looking at a certain cryptocurrency trading volume, will give you information about how volatile it is. And this is one of the reasons why this metric is so important for crypto traders.
How is trading volume calculated?
Actually, there are some different ways to calculate cryptocurrency trading volume. It can be calculated according to the data of different exchanges, so the results you get will be different.
Following, the activity on fewer exchanges accounts for less of the activity on the market. On the other hand, if you track the activity on every exchange available, you risk including non-credible data. That is because there are some smaller and unregulated exchanges that use the so-called wash-trading, just to create an illusion of some kind of activity on the platform.
So, it is absolutely possible for different indexes to report different trading volume for specific cryptocurrencies.
How can we use crypto trading volume?
Volume helps us predict the direction of a cryptocurrency. It is a really effective indicator of a specific cryptocurrency demand. Traders use volume to predict the short-term worth and profitability of cryptocurrencies.
Actually, researches show that crypto trading volume is the most valued market indicator, used by traders.
If a trading volume is high, it leads to fair prices, while a lower trading volume means that it is difficult for buyers and sellers to find an agreeable price. Good thing is that between low-volume and high-volume exchanges can create great cryptocurrency arbitrage opportunities. Not only that, but traders are also able to find points of resistance in the market.
According to some experts, trading volume speaks to the sincerity of the price it is tied to, and others say that it is an imperative trading metric.
Trading volume drawbacks
As we already said, cryptocurrency trading volume can be a really handy metric, yet it has some drawbacks. For example, wash trading can twist the volume. Another common method, “spoof trading” can also increase volume artificially. That is when traders list orders on exchanges, but withdraw them before fulfilling.
Volume indicators
Momentum
Trading volume can be a good indicator of price momentum, as the increasing volume of buying can push the price of a certain currency higher. Of course, for that to continue, volume should be maintained
Spikes and exhaustion
Spikes in volume can be an indicator of laggards buying into a move, exhausting the buyers or sellers and giving a signal for the end of the move.
Money Flow Index
MFI runs from 0 to 100 and uses volume as an indicator of overbought or oversold conditions.
If MFI value is over 80, this is a suggestion of a price reversal due to a buying volume. A value of 20 or under means the opposite - excessive selling volume.
Conclusion
As it became clear, cryptocurrency trading volume can be a really useful metric for crypto traders and market analyzers. While a high volume represents accurate prices, low volumes could mean that the prices could change.
It is also important to remember that volume can be a less accurate metric when it comes to cryptocurrencies with larger market capitalization.
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