Volume, also known as trading volume, refers to the size of a position or the total amount of contracts executed at a specific timeframe. When trading cryptocurrencies, volume can act as a great indicator of how popular an asset is or how many coins/tokens have exchanged hands for a period of days, weeks, months, and so on.
In technical analysis, volume is generally used to examine the strength of a move. For example, more significant amounts of volume mean that a bullish breakout is more likely to succeed. Likewise, a bearish phase will last longer if it is backed by real volume rather than only a few whales selling.
Volume is particularly important for options traders and those who trade by analyzing order books. Nevertheless, even standard traders can make great use of volume by applying it when conducting TA.
While volume does not necessarily always play a key role in predicting future price movement, it is still important to stay aware of it and to combine the data with other indicators and tools.
The first use case of volume is trend confirmation. Markets generally see rising volume in synergy with prices, which means that bullish moves require bullish volume. If an asset does indeed move, but the market does not experience a significant increase in volume, this is a potential warning that the move is weak. As such, we can use this knowledge and act carefully by expecting a potential reversal.
Volume is also great at indicating market exhaustion, similar to how RSI works. If a sharp move downwards/upwards occurs in combination with a volume spike, it is a sign that one side of the market is exhausted. For example, traders who panic sell in a black swan crash will lead to no supply liquidity, which in return means that there is no possibility for further downside. As a result, buyers can step in and move the price back up.
Certain market patterns depend heavily on volume. Traders using volume-based RSI can spot hidden bullish or bearish divergences in situations where:
One more use case of volume is differentiating between breakouts and fakeouts. If a breakout is followed by equally rising volume, then it is almost confirmed that the move is indeed a breakout. If the move is followed by sideways or falling volume, it is more likely for a fakeout to occur.
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