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Volume is a critical metric in cryptocurrency price prediction. As a result, experts have used it to predict the short-term direction of the price of a digital asset. In technical analysis, the price history, current price, the volume of an underlying asset, and a few other indicators are the backbone in ensuring an asset’s price is predicted accurately or near accurately.
What is a Volume in Cryptocurrency Trading and Why it is Important
Volume is simply the amount of a cryptocurrency traded within a given timeframe. In other words, it is the amount of cryptocurrency bought and sold within a particular timeframe, usually 24 hours. Volume is a clear summary of an asset’s demand and supply, which interacts to determine the market price. Interestingly, the volume can be used to predict whether a bull run would last or not.
Several indicators have been introduced in technical analysis to help use volume to predict an asset’s price’s short-term movement. One popular indicator is the On-Balance-Volume introduced in 1963 by Joseph Granville. This indicator makes use of market sentiments to predict the movement of the price. According to this indicator, when an asset’s volume increases sharply, and there is no significant rise or fall of the corresponding price, the asset’s price would eventually fall sharply or rise sharply.
How it works is simple. If today’s closing price of a cryptocurrency is higher than yesterday’s or the previous day, the On-Balance-Volume can be derived by adding today’s volume to yesterday’s trading volume. Besides, if today’s closing price is lower than yesterday’s closing price, we subtract the day’s volume from yesterday’s volume to get the On-Balance-Volume.
Moreover, using the “Rising or Falling Market Interest” indicator is very common in cryptocurrency trading. When an asset’s price rises as the corresponding volume decreases, there is a high alert that the bull run would not last. This may be a false price that can crash back to default as the investors’ interest remains negative.
Introduction to the Buy vs. Sell Volume Indicator
Coinalyze has introduced a handy volume indicator that goes the extra mile to advance analysis compared to the traditional indicators. One of such volume indicator is the:
Buy vs. Sell Volume
Unlike most of the traditional volume indicators that place preference on the direction and the number of coins traded in the last 24 hours, Buy vs. Sell volume presents the exact amount of a cryptocurrency’s purchasing power in an easy way for market analysis. It provided the ratio between the amount of a cryptocurrency bought and sold within a given timeframe. This makes it a bit easy to predict the next price movement when the red bar is visualized as “sell” and the green bar as “buy.”
Choosing any pairs in the market, the change in the ratio of the price can be seen and easily be compared to the change in the ratio of the volume. Like the regular indicators, a rising price with a high sell pressure reflected in the volume sends a signal that the price will not stand. Similarly, a falling price with a rising demand sends the price rising.
Interestingly, traders who have little experience with bars can decide to view the change in volume in percentages. This makes it easy for analysis.
Buy vs. Sell Count
The Buy vs. Sell Count places preference on the total number of orders executed within a given timeframe. Using this separately with the Buy vs. Sell volume usually gives different results. Due to this, experienced traders combine these two or with other indicators to get accurate predictions.
In situations where one sell order of 15,000 BTC is executed in 30 minutes, and 15,000 BTC buy orders executed with 1 BTC each, in the same timeframe, the Buy vs. Sell volume indicator will show the same value for the buy and sell while the Buy vs. Sell count shows a buy value of 15,000 more than the sell value. This is because the Buy vs. Sell Counts deals with the total number of sellers and buyers engaged in the market order while the Buy vs. Sell Volume deals with traded assets.
This basically means prices may not always be driven by the trading volume but by buyers and sellers’ many small orders. When an asset’s price rises, about many, placed small orders as the volume falls, the price may surely drop as there would not be enough volume to hold the price.
Relative STRENGTH Index (RSI)
The Relative Strength Index is a momentum indicator. It makes use of the value between 0-100 to predict that an asset is overbought or under-bought. When the value exceeds 70, it means the asset is overbought, and when it falls below 30, it means the asset is oversold.
Traders combine this with the Buy vs. Sell Volume to predict the price’s direction about the volume. These two usually have to complement each other to make decisions.