An Intro to the Volume Indicator
Content:
General Information-
What is Volume?
How is Volume calculated?
Common Ways Investors use Volume
Advanced Ways Investors use Volume
Closing Thoughts
General Information-
What is Volume?
Volume is the exchange of the total quantity of an asset that has been traded over a certain period of time. Volume is used to forecast the direction that a trend is heading into. Volume may also be used to spot reversals, continuation, and confirmation of a single trend. Volume is best used to help determine how strong a trend may* be.
2. How is Volume calculated?
The truth is, that there is no mathematical formula for calculating volume. Volume is just the total quantity of an asset that is being traded over a certain period. If you look at the image below you will see the price + volume bars at the bottom. The volume bars display how much liquidity is being traded on the asset, varying on the time frame you choose. In the instance, below you can see that the daily volume is 1.11M dollars on the daily time frame that is going to close in 2.27 hours on the Kucoin exchange. *It is important to note that each exchange has its own trading volume. So while Kucoin has 1.11M dollars in volume, other exchanges like Coinbase, and Binance may have more or less trading volume on their exchange.
Figure A
3. Common Ways Investors use Volume
Figure B
Per the image in Figure B, you will see that volume is mostly used just like divergences except volume may be used to indicate how strong a trend may be. What do I mean? In the example below you see that initially, the price had a nasty sell-off, then led to rising price and increasing volume which is bullish per above. This signaled to the market that the trend was changing to the upside and there was a bullish sell-off that followed. As the trend continued we saw $VET uptrend but this time the trend was weakening. The price was rising but the volume was decreasing which is a sign of bearishness. But how did it keep rising if it is bearish? Just because a trend is signaling weakness doesn’t mean it can’t go higher. When prices are at all-time highs this is when retail gets involved and prices overextend.
Figure C
4. Advanced Ways Investors use Volume
An advanced way of using volume is by using nontraditional methods just like when using any other indicator. In my experience, I have found “volume climax” to be the most effective strategy. When the volume peaks 2-5 times the average, it usually means the trend is changing. In March 2020, we witnessed Bitcoin drop to 3,000 dollars with a lot of volume. Shortly after, the price slowly consolidated and reclaimed key zones. This confirmed the sell-off was completed, which then led Bitcoin to new all-time highs. Volume climax may also be used at the top of a structure, which usually ends most bull cycles.
Figure D
Closing Thoughts
Volume is an indicator used by investors to gauge market trends. Additionally, Volume may be used to determine the strength of price movements. As we went throughout the article, you may see the many ways a trader may use volume. There are many other traditional and dynamic strategies that we haven’t covered. Some traders use EMA’s on the volume indicator for different strategies. This goes to show that the market is abundant and there are many strategies that one can understand. To close it off, no technical indicator is 100% efficient, especially when used by itself.