This article is an introduction to volume trading. We will talk about volume, understand the difference between volume trading vs pattern trading and look at one simple way to implement basic volume analysis into your crypto trading strategies.
WHAT IS VOLUME TRADING
Volume trading is a trading technique that takes volume (amount of transactions) into account when trading. It is important to realize that not all people who buy and sell a cryptocurrency are individuals. There are companies, central banks and institutional investors, such as hedge funds, large mining pools and exchanges themselves.
Thus, the analysis of volume traded in a given time period can be affected either by a small number of high net worth operators or by a large number of smaller traders, or ideally, by a confluence of the majorities of both groups.
That is the reality of all financial analysis, though - unless you have insider information.
IS VOLUME TRADING A GOOD FIT FOR YOUR TRADING STYLE?
Volume trading is a good fit for traders who use the classic technical analysis or pattern trading.
There is no instant profit in volume trading, which makes instant gains bias towards less suitable for this kind of trading style. Similarly, there is no moment of truth - you will not know if your trade idea worked out until long after it happened.
HOW DOES VOLUME TRADING DIFFER FROM PATTERN TRADING?
The biggest difference between volume and simple chart patterns is that volume tells more than price movements:
- volume tells how much money is actively changing hands
- it can tell us how strong a move really was and provide better understanding of the mood on the market
- volume can be used as an early warning sign to identify market reversals
Another difference between volume and pattern trading is that you can use volume confirmation to get an additional source of information in your pattern trading or technical trading.
FOR ANY TRADING STYLE: VOLUME CONFIRMATIONS
Even if you find that full-blown volume trading is not for you, it wouldn't be a good idea to ignore volume altogether. This is what "volume confirmations" are about.
Seeking volume confirmations involves looking at the volume during certain periods of highs and lows (in both price and volume) to assess market sentiment.
A classic example would be when Bitcoin was on its way up from $3,000 [mid-November 2017]. Volume confirmation can help us determine whether this is a temporary reaction or if we are witnessing a trend reversal.
It doesn't matter whether the volume is driven by a whale, or by fear, or by sentiment: A trade is a trade, once a coin changes hands its volume counts.
If volume confirms the move and extends beyond what we've seen in previous rallies, it's more likely that we're seeing a reversal in play here. Do try this at home!
VOLUME IN THE LAST 24 HOURS IS IMPRESSIVE - SHOULD I BUY?
Making long-term conclusions from short-term volume alone is rarely a good idea.
There may be a temptation to buy when you see the volume is high in the market, but it better if we look at what actually happens on such occasions: it can be a sign that Mr Market is panicking; he has dumped all his holdings and run for cover. It can also be a sign of FOMO, or fear of missing out.
It's up to you whether you think it's worth it entering the market in rush like that, or if it will be better to wait.
MORE ON VOLUME TRADING
These links are not super basic beginner information, but you don't need PhD to read them either.
- VPVR in AltcoinTrading.NET glossary - The most famous volume trading indicator is the volume profile visible range, and crypto traders can now get it on Cryptowatch
- Volume studies in TradingView public feed
- Strategies for trading (perhaps bot trading) with fixed volume profiles