Due to the high volatility of digital assets, many crypto traders use volume analysis in addition to technical indicators. This tool allows for a deeper understanding of market structure, identification of key levels of supply and demand, and determination of the activity of major players. Unlike classical technical analysis, volume analysis focuses not only on price but also on how much money actually flows through a particular instrument.
The Incrypted editorial team will explain how to use volumes to build trading strategies, as well as what data to consider and how to interpret it to enhance the effectiveness of trades.
What is volume analysis and why is it important for traders
Volume analysis is a method of assessing the activity of market participants through the analysis of trading volumes over a certain period of time. It allows you to determine how much money actually flows through the market at the moment of price movement, making it a powerful addition to classical technical analysis.
Unlike candlestick charts, volume market analysis shows how much price movement is supported by liquidity. Thus, an increase in volumes signals high activity and gives traders the opportunity to assess the real strength of the trend to avoid mistakes when entering trades. This is especially important in the highly volatile cryptocurrency market.
For example, shares of company XYZ are trading in the range of $50–$55, and after a consolidation period, the price breaks through the resistance level of $55 and reaches $60 against a sharp increase in volumes. This may indicate the beginning of a new upward trend. However, if the breakout occurs on low volumes, it may signal a false breakout followed by a price pullback.
Key principles of volume analysis
Volume analysis in trading is used to assess the strength and stability of market movements. Like other assessment methods, it is based on certain principles that link trading volumes and price dynamics.
Volume confirms the trend
An increase in volumes while the price moves in a certain direction confirms the strength of the trend. If the price rises against the backdrop of increasing volumes, it indicates high interest from market participants.