Trading with the volume indicator: part 1

Over the next few weeks, we’ll be taking an in-depth look at how to incorporate the volume indicator into your trading strategy. This is one mathematical indicator that many traders often overlook due to its sheer simplicity.

What is volume when trading crypto?

Volume is the amount of assets traded during a specific time frame, and is typically represented on a chart by red and green vertical bars. The image below shows a price chart and volume chart (highlighted in white) for BTC/JPY.

To display the volume chart on Liquid, just double click on the trading interface. If this doesn’t work, you can always add the volume indicator manually.

On a BTC/JPY 4-hour chart like the one above, each volume bar represents the amount of BTC that exchanged hands during those four hours. Similarly, a volume bar on an ETH/USD 15-minute chart shows the amount of ETH traded during those 15 minutes.

A common misconception when it comes to trading volume stems from the color of the bar. Many people seem to think that a red bar indicates sell volume, while a green bar shows buy volume. In reality, the color of the bar is just a reflection of the price candle’s closing direction, and does not determine the directional quality of the underlying trading volume.

In other words, volume is just the amount of traded assets, so feel free to ignore the color of the volume bar.

The volume profile of a trending asset

Understanding how to read the volume profile of a trending asset can help you identify possible reversal points. The BTC/USD 15-minute chart below shows Bitcoin’s recent decline from USD5,500 down to USD4,200. The red squares highlight volume candles that support the downward trend.

As you can see, trading volumes are much higher during periods of downward movement. In the first green box from the left, you can see trading volumes drop as the price of Bitcoin flattens for about two hours.

This period of low volume suggests bulls are hesitant to inject buy volume into Bitcoin. As expected, the bears come back with more volume to the downside.

The second green box shows another period where bears become temporarily exhausted. Even though there is slight uptrend in price, it’s not supported by any significant level of volume.

This suggests bulls are still hesitant to enter. Once again, the bears come back with more downside action in the form of multiple high volume bars in succession.

The third green box shows another period of hesitance from the bulls. Something changes this time around, however. Instead of bears walking the price down further, the bulls take this opportunity to inject volume to push the price upward, as shown by the fourth green box.

Unfortunately, this volume is nowhere near strong enough to break the previous bear dominance, and results in an emphatic rejection.

Conclusion

In conclusion, always look for confluent signals from the volume indicator to support the current trend in price movement. If price is moving downwards, look for increasing volume to support that movement along with decreased volume during the buyback phases.

Similarly, if price is trending upwards, look for confirmation of decreased volume during pullbacks. If you see multiple high-volume candles that don’t support the current trend, it could be a sign of an impending reversal.

Lastly, always remember that a volume bar reflects all shares traded during that corresponding candle, so don’t set yourself up for biased chart reading by taking the color of the candle into account.

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This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product.

WRITTEN BY

Brian Li

Trader, analyst, Liquid contributor. Editor of Decrypto.net.