Volume is an essential metric in cryptocurrency trading that measures the total number of tokens or coins traded within a specific period. It plays a crucial role in determining the market activity of a particular cryptocurrency pair. In this post, I will walk you through all you need to know about the crypto volume indicator and how to interpret it.
How volume is measured in crypto markets
Cryptocurrency volume is often expressed in terms of the number of tokens or coins exchanged during a specified timeframe, for example, 24 hours.
Note, however, that this metric does not include over-the-counter trading activity which on crypto exchanges can be sizeable.
How to view trading volume on a graph
Volume is usually represented as a series of bars at the bottom of a candlestick timeline, where the height of the bar reflects the trading volume at each price level.
A green or light color indicates that more people bought than sold and a dark or red color indicates the opposite.
To view trading volume you may need to select it from a drop-down depending on the charting platform you are using.
Most cryptocurrency exchanges use the graphs from TradingView.com
In the TradingView BTC price graph below I have added the volume indicator at the bottom.
This shows you the daily trading volume for the Bitcoin/TetherUS trading pair.
The volume bars show me that there was loads of volume between July and March 2023 and that activity quietened down post-April. This indicates that something was causing people to trade Bitcoin a lot during that period.
How to interpret Volume in Crypto
High trading volume suggests that a large number of market participants are actively buying or selling a particular coin.
This indicates strong market interest and high liquidity for the given period.
Conversely, low trading volume can indicate a lack of market participation.
2. Market Sentiment
If volume is increasing alongside upward price movements, it may indicate a bullish sentiment, suggesting that buyers are dominating the crypto market.
On the other hand, if volume is increasing during price declines, it may suggest a bearish sentiment, indicating that sellers are exerting more influence.
3. Identifying price breakouts.
Additionally, volume can play a crucial role in confirming or invalidating price breakouts when trading cryptocurrencies.
When a cryptocurrency breaches a key resistance or support level with high volume, it suggests high market participation and increases the likelihood of a sustained price move in the same direction.
Conversely, if a breakout occurs on low volume, it may signal a false breakout and potential reversal into a bear market.
4. Market reversal
Usually, trend reversals are preceded by a spike in volume.
For example, look at the price of Bitcoin below. The days with the highest trading volume are followed by a price reversal.
In the time frame I am looking at below the reversal is always positive.
This is likely due to a change of guard where the bulls are taking over from the bears.
Useful Volume Indicators
Volume is probably the most important metric you need to look at when analyzing the price of a specific coin.
Here are some technical indicators you can look at that are related to crypto trading volume
- Volume Weighted Average Price (VWAP), calculates the average price of a cryptocurrency based on both volume and price. Cryptocurrency traders use VWAP to analyze whether the majority of trades occurred above or below the average price, helping them gauge the overall market sentiment.
- Volume spikes or clusters. Significant spikes in volume can indicate periods of intense buying or selling pressure, potentially leading to substantial price movements. Crypto investors monitor these spikes to identify key support or resistance levels and make strategic trading decisions.
- Volume histograms, which display trading volume at various price levels, are also widely used. By comparing the volume at different price levels, traders can identify areas of high liquidity or potential accumulation or distribution zones.
- The on-balance volume (OBV) is another good indicator as it combines volume and price movements to help traders assess the strength of a trend. OBV sums the volume on days when the price increases and subtracts the volume on days when the price decreases. If OBV is increasing, it suggests higher volume and high demand are predominating, potentially indicating a bullish trend.
- Volume Moving Average (VMA), which calculates the moving average of trading volume over a specified period. Traders analyze the relationship between the current trading volume and the VMA to identify potential overbought or oversold conditions, as well as confirm trend strength.
- Money Flow Index (MFI) shows you whether coins have been overbought or oversold. A value above 80 means it is overbought and indicates a potential trend reversal can be expected. A value less than 20 indicates that it has been oversold.
What’s the difference between volume and liquidity
Both the trading volume of a cryptocurrency and its liquidity are measures of the size of trading activity but they don’t mean exactly the same thing.
Volume is the number of transactions in a specific period whereas liquidity is the amount of cryptocurrency sitting on the crypto exchange’s order books.
The higher the volume the more liquid the cryptocurrency market tends to be.
What is wash trading?
Sometimes traders or exchanges will buy and sell the coin to themselves many times to misinform others.
For example, an exchange might want to show that it has a lot of trading volume.
This would place it high in trading volume rankings and potentially lead to new customers.
Keep in mind that wash trading is illegal.
Factors that affect volume
- Exchange listings. Exchanges play a crucial role in determining the trading volumes of digital assets. The listing of a cryptocurrency on prominent exchanges can significantly impact its trading volume.
- Market Sentiment: Positive or negative news, events, or sentiments about a cryptocurrency can significantly impact trading volume. Positive news, such as partnerships, technological advancements, or regulatory developments, can attract more traders and investors, leading to increased volume. Conversely, negative news or events can lead to a decrease in trading activity.
- Price Volatility: Higher price volatility often attracts more traders looking to profit from price swings. Cryptocurrencies known for their price volatility, like Bitcoin and Ethereum, tend to have higher trading volumes.
- Market Liquidity: Liquidity refers to the ease with which an asset can be bought or sold without significantly impacting its price. Cryptocurrencies with higher liquidity tend to have higher trading volumes because traders can enter and exit positions more easily.
- Regulatory Changes: Government regulations and legal developments in the cryptocurrency space can significantly impact trading volume. Positive regulatory news can boost confidence and attract more traders, while negative regulatory changes can have the opposite effect.
- Market Events: Events like halvings (e.g., Bitcoin halving), hard forks, airdrops, and token burns can generate interest and impact trading volume.
- Macro-Economic Factors: Broader economic factors, such as inflation, interest rates, and economic crises, can indirectly influence cryptocurrency trading volume as investors seek alternative assets or hedges.
- Market Capitalization: Cryptocurrencies with larger market capitalizations tend to have higher trading volumes.
- Social Media and Influencers: Social media trends and endorsements by influential figures can lead to increased interest and trading activity in specific cryptocurrencies. For example, trading volume for Dogecoin picks up whener Elon Musk tweets something positive about DOGE.
What does high volume mean in crypto?
High volume indicates that there is a lot of trading activity for the crypto pair you are looking at. This can be often accompanied by a big price movement either upwards or downwards depending on the historical trend line.
Is high or low volume good for crypto?
In general high volume compared to the historical average indicates peaked interest and has the potential to lead to price increases. You would expect a crypto bull run to be preceded by high trading volume.
Is it good to buy if volume is high?
Yes, if the crypto asset is on an uptrend it might be a good time to buy if volume spikes. However nothing is ever a guarantee and you need to confirm the narrative with other indicators as well.
Are low volume coins good?
All coins will start from a low volume. It just indicates that the market has not really discovered them yet. You need to look at the potential of the coin and make a call on wether you think it has potential or not. Fundamental analysis is probably the only way to go.
Which crypto has the most volume?
Bitcoin and Ethereum are the two coins with the most trading volume.
Does volume mean buy or sell?
High volume on an uptrend could indicate a buy but you would need to look at other indicators as well.
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