This article focuses on the basic principles of volume analysis and the things you need to know as a trader to employ both volume analysis – volume trading strategy.
What is Volume?
Volume refers to the amount/quantity of asset that has/is traded over a period of time (i.e different time frames). For instance, if the volume of ethereum or bitcoin traded on 4H timeframe on binance exchange is 100million USDT, it means 100million worth of ethereum or bitcoin has been sold and bought at that time frame.
In volume analysis, low volume and high volume are greatly considered as you have heard traders talk of low volume and high volume. Low volume is volume that is lower than average volume and high volume is volume that is higher than average volume. Average volume on the other hand refers to the moving average of volume which is calculated on the basis of previous sessions. The moving average uses a period 20MA by default.
Understanding volume in trading is important as it denotes amount of an asset bought or sold by financial institutions (Smart Money) when volume is high and the amount of an asset bought/sold by retail investors when volume is low. So, surge in volume implies buying/selling by smart money and vice versa for retail investors.
Volume Trading Strategy
The strategy employed in trading volume will be discussed as follows:
1. Increase in price with increase in volume
Here, when price increases, volume increases and the volume acts as a support for the uptrend. So, when the direction of the market is spotted, opt in to confirm direction with volume.
Tip: Look for long entries
2. Increase in price with decrease in volume
This happens after downtrend and there’s a correction in prices and not a reversal to an uptrend. Volume does not support the surge in prices, so, further downtrend is predicted.
Tip: Exit long entries and spot for short entry
3. Decrease in price with increase in volume
This will be a bit tricky, but I advise you read it again. When there is drop/decrease in price, the volume also increases due to the asset been sold at large amount over a fixed period by smart money. So, decrease in price with an increase in volume supports the downtrend.
So, if increase in volume leads to a downtrend and support zone is broken, this leads to high volume as well as high momentum entry – Emperor BTC
Tip: Look for short entries
4. Decrease in price with decrease in volume
This happens after uptrend and its the opposite of the second strategy. The decrease in price is not supported by volume and can be regarded as a correction in uptrend and not a confirmation or reversal to downtrend.
Tip: Exit short entries and spot for long entry.
When all of these strategies are observed, to trade, you need to find a support level and then look out for Volume Expansion at this zone and you can either long/short your trades. From our charts above, you can observe that there is volume expansion or surge.