Volume analysis is considered to be a powerful tool for trading cryptocurrencies, especially Bitcoin.
In fact, analysis of price trends is only part of the picture, while analysis of trading volumes reveals the strength of price movements.
For example, a potential price increase with high volume indicates investor confidence, while low volume with the same price movement may need to be considered a false signal or a trap.
volume
“Trade Volume” refers to the total number of BTC or fiat equivalents traded on an exchange or market during a particular period.
Volume can be analyzed on different time frames, but the most commonly used is the daily time frame.
When analyzing Bitcoin price trends over a specific period of time, it is always a good idea to also look at the trading volume within the same period.
However, there are two other variables to consider besides time frame when performing Bitcoin volume analysis.
The first concerns the market considered.
In fact, volume data is often only available on individual exchange platforms or for specific trading pairs.
For example, the volume on Binance is not only different from the volume on Coinbase, Bybit, or Bitget, but also different for each pair, such as from BTC/USD to BTC/USDT or BTC/USDC.
The second variable is the unit of measurement.
In theory, the best approach would be to use BTC itself as the unit of measurement for trading volume, as it simplifies calculations. However, in reality, the US dollar is primarily used, which complicates the situation a bit.
First of all, to get a more comprehensive picture, we need to aggregate the trading volumes of the major exchanges (although quantitative analysis performed on large exchanges is often sufficient).
Moreover, the need to sum the volume of all trading pairs, even those that do not include USD, complicates the problem significantly (as USDT and USDC are not always equal to exactly 1 USD).
In either case, on traditional candlestick charts, trading volume data is typically displayed as a bar below the price, often in BTC.
utility
Bitcoin volume analysis is important because it confirms trends, shows signs of breakouts, detects divergences, and measures liquidity.
When it comes to trends, it shows solidity. For example, an uptrend where volume increases is sustainable, but there is a risk of reversal when volume decreases.
Breakouts can also be confirmed by volume analysis. For example, a resistance level with a spike in volume is definitely more reliable than a resistance level with a lower volume.
Also very interesting is the analysis of divergence. For example, if the price goes up when in fact the trading volume goes down. In such cases, performing volume analysis can reveal weaknesses that remain hidden.
Finally, you can understand how liquidity works, but in this case it is not recommended to use BTC as a unit of measurement. Rather, use USD or other fiat currency (USD is usually the most commonly used).
Unfortunately, some exchanges may display false trading volumes, but this is not due to actual trading between users, but rather due to manipulation by the exchange itself to make trading volumes appear higher than they really are.
Considering that trading volumes can be manipulated in the cryptocurrency market, we recommend using and analyzing aggregated data from trusted sources such as CoinMarketCap, CoinGecko, and TradingView.
How to perform volume analysis
First, you need to identify and analyze the volume bar.
These are usually located below the candlestick chart and are displayed in the same color as the candlesticks. If the closing price of the candlestick is higher than the opening price, it will be displayed in green, and if the closing price is lower than the opening price, it will be displayed in red.
At this point, you can make two interesting comparisons with the volume bar.
The first step is to look for obvious anomalies, such as spikes in trading volume (sudden peaks) or actual crashes.
In this regard, it is important to note that, like candlesticks, volume bars should only be analyzed after a trade has closed, not while it is forming. For example, today’s volume bar should be analyzed only tomorrow after the trade closes.
For example, spikes can indicate potential volatility or reversals. In fact, trading volumes often spike during certain events such as halvings or regulatory news.
The second approach is a comparison with historical averages. In this case, we recommend comparing the volume bars with historical periods, especially those of recent periods. Often you can add a moving average to a volume bar, for example. For daily candlesticks, you can set this to 365 periods to display the annual average.
tool
One of the most recommended platforms for doing analysis is TradingView. The basic version is free and includes many crypto markets, but also offers a number of advanced analytical tools and integrations with many real exchanges.
Alternatively, for a more superficial analysis, you can use an aggregator like CoinGecko or CoinMarketCap, which are especially suitable for beginners.
Alternatively, more advanced tools such as Glassnode or Nansen can be used to analyze on-chain trading volume, which does not necessarily indicate buys and sells.
Naturally, volumetric analysis can also be performed on individual exchange platforms.
Additionally, to go beyond raw volume, there are metrics that integrate price and volume.
One is the so-called on-balance volume (OBV), a cumulative measure that adds volume on days with a positive closing price and subtracts volume on days with a negative closing price. Thus, an increase in OBV indicates an increase in buying pressure, and a decrease in OBV indicates an increase in selling pressure.
There is also a so-called volume profile, which shows the volume traded at each price level. That is, there is no specific time frame, but trades within the entire time range.
It is an increasingly used horizontal indicator that helps identify large trading areas that are considered strong price support or resistance, in particular the so-called Point of Control (POC), which consists of the price with the highest trading volume within the selected time frame.
Other useful indicators include the Accumulation/Distribution Line (A/D), which is similar to OBV but weighted by closing prices, the Money Flow Index (MFI), which is made up of the sum of OBV and RSI, and Chaikin Money Flow, which measures money flow.
advice
Volume analysis may seem trivial at first glance, but it is actually a powerful tool, although it is not without risks.
The main problem is fake volumes from some exchanges which completely distorts the analysis. For this reason, we recommend limiting your analysis to trusted exchanges.
However, the most common mistake is to overemphasize the results of volumetric analysis. In reality, this is by no means a foolproof method and must be combined with price analysis.
The general advice is not to limit the analysis to exchange trading volumes, but to extend the analysis to on-chain trading volumes as well, especially to identify actual significant movements by whales.
Although volume analysis is not completely sufficient to understand Bitcoin price fluctuations, it can go a long way in grasping the true understanding of Bitcoin.
