Trading volume, as the name suggests, is the quantity of transactions completed in a certain time period in the market. It can be the trading volume of a specific cryptocurrency or the total trading volume of the entire market. It is one of the important indicators of market activity and buying and selling power.
If we consider the market as a 'milk tea shop', the trading volume is the total amount of 'milk tea' sold during this period.
📋 Next, I will introduce two changes that trading volume can generate:
Volume Decrease
Form: The trading volume has significantly decreased compared to the previous period.
Essence: The views of buyers and sellers are tending to be consistent, which can be divided into two situations.
Everyone is not optimistic about this stock, believing it will fall, leading to sellers without buyers.
Everyone is optimistic about this stock, believing it will rise, leading to buyers without sellers.
Increased Volume
Form: The trading volume has significantly increased compared to the previous period.
Essence: The views of buyers and sellers start to diverge, with some purchasing in large amounts and others selling in large amounts.
📌 How does volume affect the rise and fall of prices?
Once we understand the essence of volume, we may find that it seems not very useful; the market is either up or down, right? That's correct, so we need to further understand how prices rise and fall.
The essence of price fluctuation is the supply and demand relationship in the market. For example: when there are only 50 cups of milk tea in the shop, but 100 people are queuing to buy, the store is not worried about not selling the milk tea and will raise the price from the original 5 yuan to 6 yuan. At this time, if someone is willing to pay 6 yuan for the milk tea, the price will rise to 6 yuan. If someone thinks the price is too high and does not buy, the trading volume will decrease. The store sees this and thinks it won't work; what if it doesn't sell out? So it lowers the price to 5.5 yuan. This is a volume decrease in the process of rising prices. After the price is lowered, more people will buy, and trading volume will rise again. The store feels it can do it again, so it starts to raise the price to 6.5 yuan, resulting in another increase in volume.
Through the above example, we can have a basic understanding of price increases, and the same applies to decreases. Selling 100 cups of milk tea to 50 people will lead to a price drop. I won’t elaborate further on this.
Therefore, we usually believe that volume changes before price changes. By observing changes in volume, we can have some understanding of future price trends.
For example, after a long period of sideways movement, a sudden increase in volume indicates a clear disagreement between the store and customers. The store thinks that the milk tea may decrease in price and sells vigorously, while customers believe that the milk tea price will rise and hurry to buy, resulting in a sudden increase in volume, indicating that the future price of milk tea will likely fluctuate rather than continue to move sideways. But will it fluctuate upwards or downwards?
This must be combined with the price chart, which we call the volume-price relationship.
🏷️ Let’s summarize what volume is.
Volume allows us to initially predict that future price fluctuations will increase, breaking away from the current sideways range. However, it cannot determine whether the price will rise or fall. The essence of judging whether the price will rise or fall is to see whose strength is greater between buyers and sellers, whether the stock of milk tea (sellers) is greater or the number of customers (buyers) is greater; this is the key to determining price trends.
