What is Trading Volume and Why is it Important? – Interdax Blog
The moving average for volume increased in mid-May and sustained the rising price, which closed above the fourth resistance level at the end of the month. But then the moving average declines as volume decreases, and the price rested on the pivot point for June.
As volume picks up again, the height of the bars gradually increased as Bitcoin moved from $7,600 to a high just above $13,800. Notice that the increasing height of the bars over the course of June would have indicated to remain in a long position. You could have also bought on the break of the first resistance level for June, as this was a relatively high volume day and buyers dominated the price action.
However, the large spike at the end of June correlated with the top of the price action, touching the third resistance level for June. The end of the trend was further confirmed by a large sell-off accompanied by a volume almost equivalent to that on the day the market reached a top.
Trend Reversals
If volume falters for an asset in a bullish trend, then it suggests interest is waning and a reversal is likely to follow. But a price drop during an uptrend on small volume is not a strong signal that the trend might change.
After an extended upward or downward trend, if price action is muted but volume picks up significantly and is 50 to 70 percent larger than the volume in some of the preceding sessions, then we should expect a reversal in the trend.
The cryptocurrency market is known for its volume spikes, where an asset appreciates or depreciates rapidly on good or bad news. You can use these volume spikes to take countertrade positions.
Suppose a coin release an announcement and volume massively increased as compared to its average volume, you can enter a short position as the volume is unlikely to be sustained. This strategy requires good timing though, as cryptocurrency announcements are the main driver of these sorts of volume spikes.
Volume by itself is a useful indicator by there are other tools that incorporate volume to help traders make better decisions.
We’ll look at four indicators that incorporate volume: i) Money Flow Index, ii) Elder’s Force Index, and iii) Volume-weighted average price (VWAP).
i) Money Flow Index
As an oscillator, the Money Flow Index is like the Relative Strength Index (RSI) or Stochastic, except that it incorporates both price and volume. As a result, it is also known as the volume-weighted RSI and measures the flow of money into and out of an asset over a particular time period.
The main strategy we can use to trade with the Money Flow Index is based on divergences. We can also use it like any other oscillator to identify overbought or oversold market conditions. As with the RSI, a reading above 80 suggests the market is experiencing overbought conditions while a reading below 20 means that the asset is interpreted as oversold.
If you’re unfamiliar with trading divergences, check out this article.
An example is shown below. Notice that bitcoin made lower lows in the price, highlighted with the trend line while the Money Flow Index was establishing higher lows — this is known as regular bullish divergence.
Published at Sat, 11 Jan 2020 16:29:45 +0000
{flickr|100|campaign}
