Volume

Kyle Niedzwiecki

Easy Loot Volume Example on Bitcoin

July 9, 2021

What is Volume in Technical Analysis?

Volume in technical analysis refers to the number of units or shares of an asset that have been traded in a given time period. Volume is used by technical analysts and investors as an additional key metric to make the best trading decisions. Having a good understanding of the entire market’s trading volume versus the volume of a single holding can be one important comparison that helps technical analysts to discern volume trends. 

High volumes of trading in a specific period can offer a lot to an investors’ outlook on the market or individual asset. A significant price increase along with a significant volume increase, for example, could be a valid sign of a continued bullish price action or even a bullish reversal to the upside. On the other hand, a significant decrease in price with a significant volume increase can point to a continued bearish price action or even a bullish reversal to the upside. 

It is important for technical analysts to include volume charts in their daily, weekly, and monthly time frames. Traders looking for short-term day trades are looking at hourly candles with the volume indicator open and that is completely okay as well. It all depends on your preference as a trader or investor, however, the most ideal setting to play around with the volume indicator is on higher time frames, as you get a broad sense of the market movements. Incorporating the volume indicator into making an informed trading decision can help an investor obtain a more balanced view of the market, and in this next section we’ll take a look at the daily time frame of Bitcoin (BTC) using the volume indicator.

Example of Volume

Taking a look at the 1D (Daily) time frame of Bitcoin (BTC), the leading cryptocurrency, we can identify pretty easily that the general market trend is in the upwards momentum and that Bitcoin is obviously in the midst of a bull run. I kept this chart clean on purpose to solely identify the market movements, according to the volume indicator. Zooming in on the market movements from December 2020 – January 2021, we see on multiple different instances that while the price of Bitcoin is steadily rising, the volume is also steadily increasing day after day. The upwards movement on Bitcoin from $18,000 – $24,000 that occurred in the time period of December 12th – December 17th is a valid upwards move, because the volume is increasing day after day. This tells investors that the trend will continue and this spike up is just the beginning of the show. 

Moving forward, looking at the spike upwards from $32,000 – $42,000, we see that this is also a valid move up because of the increasing volume day after day. This trend is cut short after 4 days as the volume stopped increasing. It doesn’t matter whether the volume is green / red, all that matters is the increasing / decreasing volume day after day that shows the valid price movements in the market. In this case, Bitcoin posted a hanging man candle with little volume on that 5th day, indicating that the market has reached a local top and needs to cool off before going for another leg upwards. This downtrend was confirmed by the increasing volume proceeding the confirmed move up.

How to Trade Using the Volume Indicator

Trading based off Volume is a little bit tricky, but with practice it can be one of your most useful assets. There are two trades that you can make playing the volume indicator, increase or decrease in volume. An increase of volume while the asset is going up means that the pump isn’t fake and there is real liquidity hitting the asset. This indicates very bullish momentum as well as the current uptrend is most likely going to continue. A declining volume is the exact opposite, while the asset is going down means that the dump isn’t fake and there is real liquidity hitting the asset.

The volume indicator in technical analysis is arguably one of the most important indicators, because it can be used to make informed trading decisions and identify when a trend is valid or invalid and pushed up / down by market manipulators. It is important to note, however, that just because the volume accurately depicts the trend in the market, that you shouldn’t solely base your trades on this one indicator. You should always use the grassroots of technical analysis, such as identifying levels of support & resistance, drawing well-known trend lines, and analyzing the current accumulation & distribution zones.

 

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