With margin trading, volume is your best friend

In Pro

As traders, we rely on trading volume and price volatility to make money.

Trading volume is a measure of market activity and represents the number of asset shares transacted between buyers and sellers in a given period of time.

On the Liquid trading platform, you can find a 24-hour volume indicator in the header bar. In the screenshot below, you can see 10,486.93 BTC traded in the past 24 hours on the BTC/JPY pair.

What is trading volume and volatility?

A high-volume market is also referred to as a liquid market. Liquidity describes how easily or quickly an asset can be bought or sold in a particular market.

Imagine someone trying to trade an antique grandfather clock for a barrel of Chiquita bananas.

As you can imagine, this order would probably take a long time to fill (if ever). This particular Clock/Bananas market is an extreme example of a low volume and illiquid market.

In general, price volatility shares an inverse relationship with trading volume. A high-volume market typically experiences relatively lower volatility, while a low-volume market often experiences extremely volatile price swings.

In most cases, this behavior is due to the fact that low-volume markets often have thin order books that are incapable of absorbing large orders.

Coincidentally, this is why institutional traders and retail traders with trading bots occasionally use an order placement technique called “iceberging”, which breaks large orders down into smaller lots to prevent price from spiking in an illiquid market.

Volume’s relationship with liquidation

Since crypto trading volume is directly correlated with price volatility, it’s easy to see why you should stick to high-volume trading pairs for margin trading.

Unlike normal spot trading, leveraged trading positions have a liquidation price. In a hyper-volatile low volume market, it’s entirely possible to get liquidated from a single large order in the opposite direction of your trade.

In this case, “large” doesn’t have much to do with the market cap of the asset. Instead, “large” simply refers to the percentage of the order size in relation to trading volume.

For example, BTC/JPY on Liquid is a high-volume trading pair. With 10,486.93 BTC traded in the past 24 hours, a single 200 BTC trade represents approximately 1.9% of total volume.

On a pair with much less 24-hour volume, a 200 BTC order would account for a larger percentage of the total volume.

As a result, leveraged trading would be much safer on the BTC/JPY pair because there is more liquidity to absorb orders large and small, which results in a lower chance of liquidation from unexpected volatility.

Conclusion

Trading low-volume pairs is a perfectly reasonable strategy if you’re trading on a normal exchange without leverage.

Plenty of traders take advantage of low volume and low market cap cryptocurrencies to make big percentage gains on relatively small position sizes.

However, if you’re trading on leverage, it’s best to stay on the safe side and avoid gambling on low volume trading pairs.

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. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

WRITTEN BY

Liquid

Providing liquidity for the crypto economy.