The importance of Volume in Trading Cryptocurrencies

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Disclaimer: This article is only based on my opinion, own knowledge and my experience about this topic. Thus, I am not perfectly sure that all will happen according on the will. This is only a guidance and you may not follow it. To add, I am not liable of any results of the action done by the trader.

There are lots of elements used by trader in trading like cryptocurrencies. Basically there two main thoughts in trading; fundamental analysis and technical analysis. Some preferred fundamental or technical analysis alone. Also, other combine technical analysis with fundamental analysis.

Fundamental Analysis is often used in long-term trading. Traders look for global economic news or any news events that would affect the market. For example, a token planned to released its new app or they have new project.

Technical Analysis is trading model that uses the price and volume movement or transformation. This includes moving averages and relative strength index.

"What I will be talking here is about the important of volume in trading and how it would predict the market."

Volume here means the amount of tokens traded (bought and sold).

1. Causes Volatility of the market

When an exchange indicates a low volume, it means that traders are not deciding of the price. They do not confirmed to trade because they do not meet each other's price and causes low volume of done trades. Thus, makes the market so volatile. That is the reason that I refrain trading at low volume because we can not predict whether is goes up or down due to volatility of market. High trade volume can balanced the market and will tell us how far it can go stable.

2. Affects Ask and Bid Prices

We do not only focus in a single price when we are trading. Some only consider the last price. Basically traders want to buy at Bid price and sell at Ask price. To do the trading, they will place their orders and wait for anyone to confirm the price. For example, I want to buy a 1000 token with a bidding price at $1.045, so I place the order. If there is a seller that meets my price, order will be processed (if the seller don't have enough volume, it will be processed partially and look for other seller for the remaining volume). This means that sometimes orders are not satisfied due to its volume and would result to a gap between the ASK and BID price. No volume, No orders.

The screenshot I uploaded show a price at $141.354 (last price), $140.954(Bid) and $142.896(Ask). There's a gap of $1.942 between the Bid and Ask price. The actual price is at $141.354, but if you want to buy instantly you must choose the $142.354(Ask), and to choose $140.954 (Bid) to sell instantly. Thus, you spend higher to buy instantly and gain less when you sell instantly. This gap between Ask and Bid will widen if there is a low volume.

3. Let you move In and Out the market

The importance of volume will also depends on how much do you trade. If you are high volume trader, then trade with a high volume trader. For example, if you are trading with 100 ETH, then you want to see a volume of approx. 1000 ETH. The greater the volumes means there a lots of available token to buy or sell. Thus, it is easier for you to buy and sell token which make it move in and out the market easier. So, don't bother to trade with market that you know they can not satisfy your needs. Don not buy 5 pairs of shoes when they only have 3 pairs.

4. Improves Liquidity

Liquidity describes as the degree to which an asset can be quickly bought or sold in the market without affecting its price. For example, you just bought $100,000 worth of BTH. Then you are holding an account with asset value of $100,000. Now, your money has turned into assets, it is not money anymore unless you sell it worth $100,000. when the time comes you want your $100,000 back, but you can't get it in an instant because no buyer is willing to buy all your assets (means low volume). It does not mean that you won't have you cash anymore, you can still have it but you need to wait until someone can satisfy.

That's all I can share to you guys. Hope It will help you.

Best Regards,
@thinkingmind