This week, CoinMarketCap Academy discusses the use of trading volume as an indicator in the crypto market. Learn more!
In the past months, we’ve discussed various forms of analysis, ranging from moving averages to RSI. These tools can help you determine areas of interest. However, combining these indicators with trading volume makes things more interesting. In today’s article, CoinMarketCap Academy will discuss how traders use trading volume as an indicator. Let’s get into it!
What Is Trading Volume?
The trading volume shows how much an asset has been traded in a specific period. For example, at the time of writing, CoinMarketCap reports a trading volume of over $24 billion in the BTC/USDT pair in the last 24 hours. When it comes to reading charts, volume is usually represented in terms of the number of coins, shares or futures contracts.
Analyzing volume can give a clear picture of the conviction behind a move or the liquidity in certain areas. For instance, if Bitcoin is trading in a relatively small range but the volume is high, it indicates that both buyers and sellers seem to agree that the current price is fair.
The chart above shows Ethereum’s performance over the last year and a half, with the volume per candle plotted at the bottom of the chart. A few high-volume areas are visible by the spikes on the volume chart. The spikes suggest that many people are trading Ethereum in large quantities these days. Moreover, the volume moving average indicator can help them identify if a volume spike is above average, as seen in the image below.
How to Use Volume in Trading
We have discussed what volume is and you have figured out how to find the indicator on your chart. It is time to learn how to use volume to improve our trading. Please note that the following information is purely based on my trading experience and should not be taken as financial advice.
Firstly, let’s look at volume per candlestick, as seen in the images earlier. As you now know, the volume provides data on the amount of trades, whether made voluntary or involuntary (liquidations).
Usually, high trading volume during a crash results in relief. The chart below shows the recent Ethereum crash, where prices went as low as $897. You can clearly see the volume spiking at the bottom.
Analyzing volume is especially interesting when you compare spot pairs to futures or perp pairs because the latter has liquidations, whereas spot pairs are more organic.
I usually use this kind of volume analysis while monitoring support and resistance levels. The image below shows a support level being tested twice. In the first attempt, the price briefly drops below the level but reclaims it quickly. A few hours later, the second attempt was made. The trading volumes on both the candles during the breakdowns are completely different. The high-volume breakdown, followed by a reclaim on very low volume, may suggest the sellers are in control.
I also like to see retests of moving averages or support levels on high volume. This is especially interesting when the price also prints a wick into the level and is brought back to close above the level. The combination of these factors usually indicates that the level will be flipped.
Below is a great example, which convinced me to buy a significant amount of Bitcoin in September 2020 (note from author: not investment advice, just a personal aside). We saw a breakout followed by a retest, where the combination of the price action and volume gave a hint of a successful retest and further upside movement.
Finally, another important thing to look for is a divergence between trend and volume. I generally get cautious when prices are trending, but volume is decreasing. For example, when the price keeps pushing up on lower volume, it suggest that only a few people are contributing to the trend. I usually look to exit my positions when this happens.
The cases I have discussed are mere examples of how I have used volume in the past. The key takeaway is that volume is a useful tool for confirmation. If you have already done your analysis using other trading indicators, volume can give you just that extra information to act on it with confidence.
How to Use the Volume Profile in Trading
Contrary to the volume indicator we just discussed, the volume profile plots volume by price level or area, rather than by time. The chart below shows the two different indicators, along with a few notes.
As you can see, the volume profile is plotted vertically rather than horizontally. It shows how much volume is transacted at different price levels. It can be used to identify areas of support and resistance.
The high-volume nodes are also called points of control (POC). These POCs are often respected as support levels. The blue lines mark the value area, where 70% of all trades for the selected area have taken place. In the image, VAH & VAL stands for value area high & value area low.
In addition to using the high-volume nodes, you will also find areas with little to no volume. Price often cuts through them very quickly, as nobody is interested in buying or selling in those areas.
How Do I Access The Volume Profile Indicator on Tradingview?
Find the “Fixed Range Volume Profile” option on the toolbar on the left side of your screen. From there, you just have to apply it to the area of the chart you want to analyze and the tool does the rest.
If you can’t find the option on the toolbar, click on the Quick Search option in the top-left drop-down menu.
Look up “Fixed Range Volume Profile” and the indicator will pop up.
Conclusion
You can use volume profiles to find areas of interest, liquidity voids, resistance and support. At the same time, time-based volume can be used to get more clarity in trading analysis.
As usual, volume alone will not turn you into a profitable trading wizard. I experimented with various methods of analysis before finding a system that works for me.
Writer’s Disclaimer: This article is based on my limited knowledge and has been written for educational purposes only. My articles should never be construed as financial advice in any shape or form. Good luck!
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