What Does Volume Mean In Cryptocurrency?

When cryptocurrency traders talk about volume, they mean the number of tokens or contracts traded within a certain period of time, for example during an hour or a day.

For online traders, trading volume is an important source of information, because the analysis of volume opens up a further perspective on price movements, in addition to the pure observation of prices.

In this article we explain the volume indicator and how to use or interpret it.

Volume Indicator in Crypto Trading

In trading, volume quantifies the extent of activity by market participants by cumulating the number of cryptocurrency units or contracts (as with BitMEX etc) traded in a period. For each trade, the number of securities or contracts traded is recorded and then incorporated into the volume chart.

In the chart below, the volume is inserted as a bar chart in the lower part – the red and green vertical bars. The 1-hour chart of Bitcoin presented here shows a series of up and down trends in a general sideways movement. It is easy to see how the upward trend swings upward under increased volume, marking new local highs. The same applies to the downward trend, which reaches new local lows under high volumes.

As soon as the price hits important chart marks, the trading activities of market participants increase strongly. Bulls and bears fight for the breakthrough or the defense of the targeted price level at important chart marks.

Furthermore, it can be seen that a successful breakout at contested chart marks or the successful defense of important price levels often acts as a catalyst for the price trend and can lead to strong movements.

This volume-price pattern can be found in many charts. Therefore, the rule of thumb among traders is: volume should increase in the direction of the existing trend.

Thus, in uptrends the volume bars should be larger when prices are rising than when prices are falling.

In a downtrend, the opposite is true: falling prices should be accompanied by larger volumes than rising prices.

If the volume should increase with the trend, this means in reverse that trend changes are announced by the decrease in volume.

This means: If a price in an uptrend reaches a new high while the volume simultaneously does not mark a local high, then there is a weak trend and a trend change could occur.

A weak downtrend would therefore occur if the price reaches new lows but the volume does not mark any local highs. From the perspective of volume analysis, a weak trend exists in both cases.

Thus, volume analysis is able to signal both the stability and the weakness of a trend. From this, the great importance of volume in technical analysis can be deduced.

Figure 1) Volume Analysis summarized:

Instead of the number of units traded, traders can also use the number of changes in price as a substitute for the trading volume, since behind each new price fixing is a securities transaction between buyer and seller. If the prices change frequently, this usually means a high trading volume.

Indicators that count the number of ticks (price changes) in a chart period are also called tick volume indicators. This type of volume indicator is mainly used in forex trading, as the major forex banks do not publish their traded volume figures.

Besides the activity of market participants, volume analysis also informs the trader about the liquidity of a market. An average high trading volume of a security always means high liquidity, low trading costs and better order execution.

Volume Trading and Cryptocurrency Volume Analysis

Volume is one of the most important analysis objects in technical analysis after price data. It provides information about the intensity and power of a price movement in the form of traded turnover and should therefore not be missing in any qualified and comprehensive technical analysis of market events. In order to facilitate interpretation, a large number of indicators have been developed over the years to evaluate the volume.

On-Balance-Volume Indicator (OBV)

One of the most basic and widely used of these volume indicators is the On-Balance-Volume Indicator (OBV). With the help of this indicator it is possible to compare the price development with the development of the volume over certain periods of time. In this context, divergences between price and indicator play a decisive role.

Volume Indicator (On-Balance-Volume) Price Divergence

The word divergence is derived from the Latin “divergere”, which can be translated as “to strive apart”. In general terms, it describes a deviation or divergence. In technical analysis, it refers specifically to the divergence between two chart trends or between the price trend and an indicator trend.

In the following, the focus is on divergences between the coin price trend and the OBV.

The calculation of the OBV is very simple: If the closing price of a period is higher than the closing price of the previous period, the value of the OBV is increased by the turnover of the corresponding period. If price falls compared to the previous closing price, the period sales are subtracted from the OBV accumulated up to that point.

The OBV is thus a cumulative total value of the period sales. This simple calculation scheme makes it possible to compare the price movement with the development of the volumes. Whether the OBV falls or rises depends solely on the prices. How much the indicator changes depends on the level of the respective volumes.

In general, as a sign of an intact trend, volumes should develop in the direction of the price movement. The course of the OBV should largely coincide with the price movement, as seen in chart 2.

This means: If the price of the underlying instrument reaches a local high, the OBV should also mark a local high. If the price falls, a local low should lead to a local low in OBV.

Chart 2) Trend confirmation by the on-balance volume indicator:

Chart 3 shows the development of the BTCUSD price in the weeks after the 2017 all-time-high. In contrast to the BTC price, OBV shows a downward movement both in the highs and the lows. So we had two bearish signs in this chart. The different course of both lines is a classic example of divergence. This can be interpreted as an early warning signal of an imminent trend reversal and plays the decisive role in volume analysis. As expected, after those significant divergences the market shifted into a long-term bear market, as we all know in hindsight.

Chart 3) Divergence between price trend and on-balance volume indicator:

Divergences are clearly visible above all at local extreme values, i.e. at highs and lows. Using the example of chart 3, this means that price forms a trend with higher highs. OBV, on the other hand, does not succeed in forming new highs, which means the end of the upward trend in OBV and thus speaks for an unstable trend situation in the BTCUSD price in early 2018. Divergences are usually visualized by trend lines that touch the extreme points of the movements.

In general, a distinction is made between four types of divergences, which can be derived from a combination of the different direction (bullish or bearish) and the extreme values considered (highs or lows). These are illustrated in Figure 2: the more the slopes of the two trend lines differ, the more significant a divergence is.

Figure 2) Divergences of the price trend and on-balance volume indicator:

Advantages of Volume Trading over other Strategies

For a trader, volume analysis is advantageous because most indicators of technical analysis depend on the price for their calculation. Therefore, these indicators are often referred to as lagging indicators in relation to the price because they have an inherent “time lag”, such as moving averages.

Volume, on the other hand, is a variable that is independent of price and available to the trader in real time. This makes volume indicators an independent and valuable source of information when trading. In general, the assumption is that volume anticipates the movement of prices. This means that trend changes are announced by the decrease in volume. Thus, volume analysis is able to signal the stability of a trend.

Conclusion

At this point it should be noted that price-volume divergences are merely warning signals and are therefore not primary trading signals.

However, the trader gets a valuable insight into the state of a trend movement, i.e. whether it is standing on stable or weak legs.

With Tradingview, for instance, you have an excellent software and indicator package for volume analysis, in which the most important volume indicators are represented.

Before you start live trading, you should familiarize yourself with the functions of a broker’s trading interface. With a free demo account you can test your volume trading strategies risk-free.