Indicators play an important role when it comes to the technical analysis of cryptocurrency. Their primary function is to make predictions regarding market direction. They draw their findings from historic prices and cryptocurrency volume, among several other forms of information. There are a wide variety of crypto indicators that illustrate various parameters, like trend, volume, momentum, and volatility indicators.
We touched on the topic of indicators in a previous article, but those were technical indicators. In this article, we will instead be focusing on volume indicators.
Right off the bat, it’s worth mentioning that volume itself is different from other indicators. Generally speaking, it actually does not make any form of calculation. Moreover, it does not give any buy or sell signals. In reality, what volume measures is how much of a specific currency, asset, or cryptocurrency is traded within a specific time period. Put simply, it is a rather basic tool, but a powerful one nonetheless. Every trader should take it into account.
So, why should we use volume if it is unable to give a buy or sell signal? Well, in essence, every asset’s volume reveals a ton of important information. Specifically, concerning the behavior of the price that, if decoded, can provide some vital hints about potential price directions.
Overall, the volume is among the most powerful indicators. However, because of its simplicity, many frequently overlook it. This article will shed some light on this effective tool, explaining why it deserves more attention than it typically gets.
What exactly are they?
The main objective of volume indicators is to demonstrate the changes in trading volume as time passes. This information is incredibly useful because crypto trading volume displays just how strong the current trend is. Let’s say, for example, that the price goes up and the volume is quite high. In this particular case, the trend is strong and there is a strong possibility that it will last longer.
There are an array of volume indicators that exist. However, the following are six of the most popular ones, which we will go over later:
- On-Balance Volume
- Accumulation/Distribution Line
- Money Flow Index
- Chaikin Oscillator
- Chaikin Money Flow
- Ease of Movement
A volume price trend indicator is useful for determining the exact balance between the supply and demand of security. The change in percentage regarding the share price trend displays the relative supply or demand of a particular security. Volume, meanwhile, is indicative of the force that’s essentially driving the trend.
The volume price trend indicator shares some similarities with the aforementioned On-Balance-Volume indicator. It measures cumulative volume and supplies traders with crucial information about a security’s money flow. A majority of charting software packages typically possess the volume price trend indicator.
Most traders – if not all traders – love volatility. Honestly, they would have to in order to stick around in such a fickle market. Their interest in it makes sense, considering volatility moves prices and creates trading opportunities. More often than not, a great amount of volume accompanies this volatility. Many consider markets that have very little volatility to be boring and not as lucrative. What’s more, they might be more illiquid.
In addition, when the price is more volatile, there is a low chance that it will range. The result is the creation of more room for trending positions. In other words, up or down in a certain direction, rather than sideways.
The volatility in cryptocurrencies is likely the core reason why so many investors have an attraction to it. Undoubtedly, it is also the driving force behind their price reaching high levels in such a short amount of time. Be that as it may, it is important that investors remain cautious. Volatility is capable of blowing up stop-losses too early. As a result, this leaves traders out of potentially profitable trades while trading a trend. This, above all else, is why many see it as being a double-edged sword.
An asset that has very low volume is comparable to a dead person’s encephalogram. If there is no trading activity, then there is a flat line in the chart. Put simply, the asset is dead; this is, inarguably, a trader’s worst nightmare. The volume is the primary life source in regards to trading. Its purpose is to produce volatility and, by extension, lucrative opportunities.
Most of the time, sideways market conditions qualify as “no-trade zones.” It is the time in which volume peaks, effectively breaking the range. It kickstarts trending once again as soon as most of the positions are open. It is easy to see a considerably positive correlation between volume and volatility, as well as trading activity.
Volume is the total amount of assets that trade during a specific period of time. The typical form of representation is on a chart and by red and green vertical bars. On something like a 4-hour Bitcoin chart, each volume bar illustrates the amount of BTC that exchanges hands during those four hours. Likewise, a volume bar on a 15-minute BTC chart displays the amount of BTC that trades during those 15 minutes.
There is a common misconception when it comes to trading volume. This assumption largely stems from whatever the color of the bar is. A lot of people are quick to think that a red bar is indicative of selling volume. On the flip side, they often assume that a green bar shows the purchase of volume. In actuality, the bar’s color is nothing more than a reflection of the price candle’s closing direction. On top of that, it is not responsible for detecting the directional quality of the underlying trading volume.
To sum up, volume is simply the amount of assets that trade. It is important to remember this when you are conducting an analysis of volume.
The most popular volume indicators
As you may recall, there are six volume indicators that are seen as the most powerful of the bunch. Now that we have a better understanding of what volume indicators are, we can now go further into detail about them.
1 – On Balance Volume (OBV)
On-Balance Volume is among the most popular and common volume indicators. Its foundation draws from a cumulative total volume and effectively matches price with volume. The person responsible for creating OBV is Joe Granville, who did so back in 1963.
The technique is not a difficult one to grasp. Imagine today’s closing price of a cryptocurrency or any other currency is higher than yesterday’s. In this situation, the trading volume of today is added to the previous OBV value.
(OBV = previous OBV + today’s trading volume)
Now, let’s assume that today’s closing price is lower than yesterday’s. If so, then the trading volume is subtracted from the previous OBV
(OBV = previous OBV – today’s trading volume)
OBV is able to do one of two things. It could confirm the trend by way of moving along with the price. Alternatively, it could indicate a potential reversal if it runs in the opposite of the price direction.
2 – Accumulation/Distribution Line (ADL)
Accumulation/Distribution is another indicator that takes accumulated volume into account; very similar to what OBV does. In order to calculate the A/D’s value, you need to understand the Money Flow Volume first. The following is the formula for figuring this out:
Money Flow Volume = ((Close – Low) – (High – Close)) / (High – Low) * period’s trading volume
Afterwards, you will then calculate the current A/D. To do this, you need to add the current Money Flow Volume to the previous A/D.
The Accumulation/Distribution line going up means that there is an upward price trend, with most of the traders purchasing the cryptocurrency. If the line drops, then that means the trend is moving downward. The divergence between the price moves and ADL basically means that the current trend will likely change. What’s more, it will go in the exact same direction along with the indicator.
3 – Money Flow Index (MFI)
Money Flow Index is a useful indicator for the measurement of buying and selling pressure. It bears a striking resemblance to the Relative Strength Index, but the difference is it focuses on volume.
MFI is a line that moves between 0 and 100. An MFI that rises indicates an increase in buying pressure. An MFI that falls, on the other hand, indicates an increase in selling pressure. Should the Money Flow Index value surpass 80, then the crypto market is officially overbought. Therefore, it means that one needs to watch out for a probable downturn in the coins’ price. If the value falls below 20, then the cryptocurrency market is oversold. This means that there is a strong possibility of the price eventually taking an upward turn.
4 – Chaikin Oscillator
The Chaikin Oscillator is a good way to measure the overall momentum of the ADL. It can do this by simply drawing a line that will fluctuate between positive and negative values.
The formation of this line comes from subtracting the ADL’s longer-term exponential moving average from a shorter-term exponential moving average. A value that is highly positive indicates high ADL momentum, as well as high buying pressure. Highly negative also means high ADL momentum, but the difference is it indicates high selling pressure.
Understanding the changes in momentum is key to helping a crypto trader to predict trend changes. This is mostly because changes in momentum usually predate trend changes.
5 – Chaikin Money Flow (CMF)
Chaikin Money Flow is a volume indicator that is useful for measuring Money Flow Volume over a specific time period. The Money Flow Volume metric helps measure the buying and selling pressure, meanwhile, CMF sums Money Flow Volume over a certain time frame.
CMF’s value typically fluctuates between 1 and -1. The former is when buying pressure is higher and the latter is when selling pressure is higher. You can use this indicator as a method of further quantifying changes in buying and selling pressure for cryptocurrencies. Additionally, it can help forecast any future changes concerning crypto trends.
6 – Ease Of Movement (EOM)
Ease Of Movement is an oscillator that fluctuates between positive and negative values. Put simply, whenever EOM is in high positive values, it means that cryptocurrency price is increasing on low volumes. Now, suppose that the values are highly negative. In this particular case, it means that the price of crypto is decreasing on low volumes. In both scenarios, low volumes are indicative of a potential reversal.
Moving average of this indicator can act as a sort of trigger line and also generate signals vital for crypto trading. EOM is frequently a secondary indicator in conjunction with an array of other technical indicators and chart patterns.
Notable faults of volume indicators
For all of its merits, the volume does have its fair share of faults. For instance, volume on crypto exchanges might not indicate that buyers will go through with an intended purchase. It is possible to fake volume with ‘spoof trading’. This refers to when traders put in orders for other traders to see but withdraw them prior to being filled.
Admittedly, there are some exchanges that have been in the middle of a scandal pertaining to the true volume being incorrectly put out. As a result, it manipulates traders into entering a risky trade that is likely unprofitable.
Regardless, there is still some validity when analyzing Bitcoin’s association with the volume on the charts. Not only can they provide an additional signal to add to your bias, but they can also signal interest in the entire asset class. The representation of this is in the form of Bitcoin’s demand. One just needs to remember to choose an exchange that can be cleared of any misconduct.
It’s always good to be on the lookout for confluent signals. Specifically, from the volume indicator in order to support the current trend in price movement. If the price is moving downwards, you can look for increasing volume to support that movement. In addition, look for decreasing volume during buyback phases.
In a similar vein, if the price is trending upwards, watch for verification of decreasing volume during pullbacks. Let’s assume that you see an array of high-volume candles that do not provide support for the current trend. This is likely a sign indicative of a looming reversal.
The last thing to remember is that a volume bar is a reflection of all shares that trade during the corresponding candle. With that in mind, do not put yourself in a position of biased chart reading. Make sure that you take the candle’s color into account.