Trading volume is the measure of shares or contracts traded against a security for a specific period of time. By evaluating the volume of an asset including crypto, investors can analyze the market activity and participation, which assist them in making an informed investment decision. Exchange platforms display the 24-hour trading volume in the tokenomics of the crypto, showing the strength of price movements.
In this article, we provide you with every information about trading volume including their advantages and importance.
Understanding Trading Volume
Trading volume is the total number of shares or contracts bought, sold, or traded during a certain time period against a given security. The trading volume of an asset indicates its market value, the higher the volume the higher the investor’s interest towards the crypto, and vice versa. A higher trading volume of a specific security shows an increase in liquidity. By analyzing the daily average trading volume, one can identify whether there is a buying pressure or a selling pressure for the security, which helps them to decide whether it is a good time to buy the asset. It is one of the technical factors utilized in the technical analysis of an asset.
It often becomes high during the opening and closing of the exchanges and also on Mondays and Fridays. The volume becomes low on holidays. These are expressed hourly and daily, giving an estimate of the trades that happened in the following day. High trading volume accompanied by price changes can reinforce the value of a security.
How Trading Volume Works?
Trading volume is calculated by counting the total number of shares or contracts traded during a specific time, most often during a day. These are automatically calculated by the exchange platforms and the data is displayed along with the price charts. The value is reported on an hourly basis throughout a trading day. The estimated value published during the day may sometimes have fluctuations from the actual value reported the next day.
It acts as an indicator of market activity and liquidity. An increase in the volume indicates a high buying or selling, which means high liquidity and high market activity. Similarly, a decrease in the trading volume shows the lack of investor interest in a certain asset, decreasing its liquidity and market value.
Different Aspects of Trading Volume
It plays a major role in making an informed investment decision, the change in trading volume helps investors to understand the possibilities behind the price moves. Aspects like increase in volume and price, decrease in volume and price, decrease in volume and increase in price, increase in volume, and decrease in price show a bullish or bearish trend in the market.
Increasing Volume and Increasing Price
An increase in volume accompanied by an increase in price indicates a bullish trend. The increase in both price and trading volume signals that the number of traders participating in the buy and sell of specific assets is high, and the demand for the asset tends to increase.
Increasing Volume and Decreasing Price
An increase in the volume and a decline in price signals a bearish trend. This indicates the market is dominated by sellers, creating a selling pressure. This in turn can increase the number of sellers even further and more price drops can be expected.
Decreasing Volume and Decreasing Price
A decrease in volume accompanied by a decline in price indicates a market downtrend, indicating less interest in investors in the asset. However, this doesn’t confirm a price reversal soon, rather it shows less conviction in selling.
Decreasing Volume and Increasing Price
A decrease in volume and an increase in prices show a weak upward trend. The number of traders participating in the trade is decreasing, which means a decline in demand for the asset. This condition can increase the risk of a market reversal as the price upheaval may not be supported by many traders.
Importance of Trading Volume
It is used to analyze the buy and sell of an asset in the market, through which a trader gets to know whether it is a good time to buy the asset. It indicates the investor’s interest in the asset, contributing to the demand and price. It helps investors to evaluate the existing and upcoming market conditions. An increase in price along with a decline in trading volume indicates a diminished strength of the asset, potentially leading to a market reversal. A high volume supported by a strong market condition can bring a price breakout. It also shows how many times an asset has changed hands. By evaluating the trading volume investors can understand the market trends, whether it is bullish or bearish, and make a trade accordingly.
Read More: What are Digital Assets?
Final Thoughts
Trading Volume is one of the many factors used to create the technical analysis of an asset. It determines the number of trades that occurred during a particular period of time in a specific asset. It helps investors analyze the price movements and market conditions, thereby allowing them to make an informed investment decision. However, the crypto market is highly volatile and the value of assets is determined by several other factors. Always do your research before making an investment decision.
