Momentum
Increasing volume of buying will push the price of a cryptocurrency higher, but for that to continue, volume must be maintained. In that way, volume can be a good indicator of price momentum.
Rising prices on declining volume can indicate declining momentum and potential reversal. Falling prices on declining volume can equally signal a shift in direction.
Spikes & Exhaustion
Though spikes in volume can be associated with new momentum in either direction, they can also signal the tail end of a move, in what is known as Exhaustion. A large spike in volume might indicate that laggards are buying into a move as it peaks, exhausting the buyers or sellers, and signalling the end of the move.
On Balance Volume
On Balance Volume is a simple measure of the influence of changes in volume that can be correlated with price. To calculate OBV start with an arbitrary number say 100, and if daily volume increases add the volume to OBV; if it decreases, subtract it.
Money Flow Index (MFI)
Money Flow Index runs from 0-100 and uses volume as an indicator of overbought or oversold conditions. Much like Relative Strength Index it is a measure of whether the market is getting overheated.
MFI values above 80 are suggestive of a price reversal due to excessive buying volume, whereas a value of 20 or lower may suggest the opposite – excessive selling volume and oversold conditions.
These examples are just a few of the possible indicators commonly used in Technical Analysis, and illustrate one of the biggest difficulties facing a Trader. What tools choose from among the multitude of potential indicators?
Given you are just starting out, it is wise to keep it simple and use volume as part of a general assessment of liquidity (and potential slippage) and as an aid to momentum.
Our next article on how to trade crypto will introduce some of the most commonly used technical indicators which can be used alongside the skills acquired so far in terms of understanding price discovery, price charts, candlesticks and volume.
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