"Price lies, but volume never lies" - this famous quote by technical analyst Richard Wyckoff summarizes the importance of trading volume. Did you know that most beginner traders focus only on price movement, ignoring the 'fuel' that drives this movement?
Omar, a software engineer, lost a significant investment in a cryptocurrency that saw a sharp rise. "The price was rising strongly, so I bought enthusiastically. I didn't notice that the trading volume was decreasing with each new high - a clear signal of weakness in momentum." Today, Omar doesn't make any trading decisions without analyzing trading volume first.
Trading volume is the number of units (or their value) traded over a specific period. It can be considered the "market voice" that reveals how convinced traders are about price movement. Here’s how trading volume can be used to make better decisions:
- Confirming trends: In a healthy trend, volume should increase with price movement in the direction of the trend. In an uptrend, volume should be higher during upward waves and lower during downward corrections.
Always look for 'harmony' between price and volume. When the price rises with an increase in volume, then pulls back slightly with a decrease in volume, know that the uptrend is strong and healthy.
- Identifying reversals: Changes in volume patterns often precede price reversals. For example, if the price is making higher highs but with decreasing trading volumes, this indicates weakness in momentum and a potential reversal.
- Confirming breakouts: A genuine breakout of a resistance or support level should be accompanied by a significant increase in trading volume. A breakout on low volume is often false.
Karim, a professional trader, shares his strategy: "When the price breaks through an important resistance level, I wait to see the trading volume. If the volume is weak, I expect the breakout to fail and prepare to sell. If the volume is strong, I consider it a genuine breakout and think about buying."
- Identifying turning points: Trends often end with what is called "capitulation volume" - a massive increase in trading volume indicating the capitulation of the last holders of the old trend.
Useful trading volume indicators:
- On-Balance Volume (OBV): It adds volume when the price closes higher than the previous day and subtracts it when it closes lower. It helps in identifying accumulation or distribution of assets.
- Money Flow Index (MFI): Similar to the RSI, but it incorporates trading volume, making it more sensitive to changes in market dynamics.
Challenges of volume analysis in the crypto market:
- Multiple platforms: Unlike traditional markets, cryptocurrencies trade on dozens of different platforms, making it challenging to measure total volume.
- Manipulation: Some small projects may manipulate volume to give the impression of higher liquidity.
Fadi, a blockchain developer and trader, says: "I prefer to look at trading volume on major platforms only and ignore abnormal spikes that may indicate manipulation."
Jesse Livermore, one of the greatest traders in history, said: "Prices move in the direction of least resistance, and volume tells you how much resistance there is."
Remember that trading volume analysis is not an exact science, but an art that requires practice and experience. Start by observing the relationship between price and volume on charts, and you will gradually begin to see patterns and signals you hadn't noticed before.
In the next post, we will learn about the Dollar-Cost Averaging (DCA) strategy - the smart way to invest in a volatile market. Are you ready to discover how simple discipline can outperform attempts to time the market?