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What Does Volume Mean in Crypto?

In the crypto industry, there are several major metrics that can help users to evaluate any cryptocurrency. Apart from the circulating supply and market capitalization factors, trading volume is another such metric. 

In the financial sector, the trading volume is the number of shares that were traded in a certain period of time. As questions such as the ones concerning the profitability of trading with crypto and the legality of Bitcoins in the UK have been answered, many new users are looking for ways to extrapolate the techniques commonly used in the financial sector in the past to deal with cryptocurrencies today. 

So, what does volume mean in crypto? Why is it important and how can it help you to optimize your investments? The answers to these and other questions are located in the article below. 

Trading Volume Defined

Basically, the trading volume in the world of crypto refers to the total monetary amount for which a certain cryptocurrency had been traded, over a certain period of time. 

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We can look at trading numbers in a more narrow way, by focusing on a certain cryptocurrency’s trading volume on just one crypto exchange. Or, we can examine a cryptocurrency’s total trading volume, across all exchanges. Both of these pieces of data can be important, depending on what we’re looking for.

What Can Crypto Volume Signals Tell Us About Crypto’s Stability 

The total trading volume of a cryptocurrency is a great indicator of that crypto’s stability/volatility. If a crypto’s buying volume is more or less equal to the selling volume, then the price of that currency will be stable. As a general rule, the higher the crypto volume is, the better investment will that currency make. That is because the high trading amount means that the market for the given crypto will be more stable. 

Sometimes, a new currency on the market may appear to be popular due to the buzz created by lots of people who are talking about it. However, that’s far less important than the actual trade number. It’s not a rare occurrence that a new crypto is hyped, but has low trading numbers, indicating that investors generally didn’t put their trust in that crypto. The result is that investing in that cryptocurrency won’t earn you a significant (or any) profit.

In fact, exchanges will usually stop dealing in cryptocurrencies that are marked by having low trading volume. However, not all such cryptos are doomed to failure. Some, otherwise promising cryptos with low trading volumes can be rescued by the sufficient amount of money invested in them. However, recognizing such cryptos is tricky and is best left to the experts.

4 Ways to Utilize Trading Volume to Predict Future Trends

Let us now take a look at some of the more specific ways that the knowledge of trading volume can inform our trading decisions.

Price Momentum 

As the trading volume of a currency increases, so will its price. However, if the volume doesn’t keep rising, the price may change. 

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Therefore, the trading volume indicators can provide us with useful insights pertaining to the price momentum of that crypto, i.e. the rise or fall trends of the crypto’s price.   

If a trading volume is in decline, but the prices are still rising, this indicates the likely possibility of the rising price momentum changing soon and beginning to decline. Conversely, if the volume is in decline and the prices are declining as well, this can lead to a higher trading volume as the currency will be cheaper to purchase.

Crypto Exhaustion

Upon seeing spikes in trading volume, the first thought is that such a spike indicates the formation of a new price momentum. And while spikes in both directions could indicate just that, this is not always the case.

Namely, spikes can also indicate the Exhaustion of the given crypto. When a crypto is exhausted, that means its current price momentum is stopped. This happens when the spike had been so large that it effectively exhausted buyers and sellers, marking the end of the price move in either direction.

MACD

A crypto’s trading volume can be used in conjunction with the so-called moving average convergence divergence (MACD) factor. But, what is MACD in crypto? To understand the concept behind this complicated acronym, we must first examine two other acronyms: SMA and EMA. 

A simple moving average (SMA) is simply the average value (in this case, the trading volume) of a crypto over a period of time. The exponential moving average (EMA) is slightly more complex, and shows the exponentiality of the differences in trading volume over a period of time.

MACD shows us the points where the trading volume data of SMA and EMA converges, and the points where they diverge. With this information, a user can more accurately predict future trends in the market.

MFI

The MFI (Money Flow Index) can be used to predict a crypto’s potential price reversal. This index can tell us whether a crypto is currently being overbought or oversold. This data is among the best crypto indicators that should influence your trading decisions.

The MFI uses the 0-100 scale in order to evaluate any crypto in this way. Any number between 20 and 80 indicates that the market is currently not overheated, i.e. that the given crypto is neither being excessively bought nor excessively sold. However, if the number is higher than 80, then the price reversal is likely to occur due to a crypto being overbought by users. Likewise, if the number is below 20, the price reversal will occur because the given crypto is being oversold.

Parting Words

So, what does volume mean in crypto? If you take the time to learn and improve, the trading volume means better business. In this article, we’ve examined some ways in which the awareness of the trading volume can help you to skillfully analyze the market and, thus, invest with a higher chance of making a profit. 

It should be noted, though, that these are just some of the techniques that a beginner will find to be useful. Experienced users can utilize the trading volume numbers in different ways, but that is a topic for another time.

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