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Volume Indicators for Crypto Price Prediction: A Basic Introduction

Volume indicators are a group of technical indicators that are very important for determining how strong trading sentiment is at a particular time. Because of this, they play a significant role in every technical analyst’s strategy.

Volume Indicators for Crypto Price Prediction - Header Picture
Volume Indicators for Crypto Price Prediction – Header Picture

So, in this article, we’ll be discussing volume indicators and some of the most common indicators in this category. Let’s get to it.

What Are Volume Indicators?

Volume indicators are technical analysis tools that measure the trading volume of market participants over a specific period. They check how much of an asset is being bought or sold over a predetermined time to assess the strength of the prevailing trading sentiment. 

Unlike most other indicators, volume indicators are technical analysis tools that place a significant emphasis on trading volume to measure the value of a cryptocurrency. Rather than focusing on price primarily, they provide insights into the level of activity or participation in the market. They can help you assess the strength or weakness of price movements.

Using volume indicators, you can confirm how valid current price trends are, identify potential trend reversals, and make better-informed trading decisions. However, it’s important to note that volume indicators work best when combined with other technical indicators to generate better accurate signals.

However, using a tool like the Crypticorn Price Prediction Dashboard eliminates that problem.

AI crypto price prediction dashboard, AI crypto trading, AI crypto bots, crypto AI prediction copy trading and AI smart Investing Dashboard Crypticorn
Crypticorn Price Prediction Dashboard

There are several volume indicators you can use in the crypto market today. The most common ones include On-Balance Volume, Accumulation/Distribution Line, the Chaikin Oscillator, and the Money Flow Index.


Why Are Volume Indicators Important in Crypto Trading?

Volume indicators are essential in crypto trading for the following reasons.

Confirmation of price movement

Volume indicators help confirm how valid specific price movements in the market are. When prices move in conjunction with high trading volume, either buying or selling, it indicates strong market participation and validates the significance of the price trend. 

That is, if the price of a token starts rising steadily and a significant volume of it is being traded, a bullish session is in order. If the opposite happens, a bearish trend is likely currently happening.  

Conversely, price movements accompanied by low trading volume mean traders in the market may lack conviction and signal low sentiment or a potential reversal.

Liquidity and volatility 

One advantage of volume indicators is that they assure you of how liquid the market is at a particular time. Higher trading volumes translate to higher liquidity, meaning you can enter a trade without worrying about slippage. This situation occurs when your trading activity influences the asset’s price.

Furthermore, volume indicators enable you to profit from volatile market conditions. Typically, higher trading volumes affect the prices of cryptocurrencies drastically, so if you can take advantage of these price movements when they last, you could make a profit.

Spotting divergence

Divergence is usually associated with momentum oscillators. However, you can also use volume indicators to identify divergence patterns between volume and price movements. 

A bullish divergence occurs when prices form lower lows while trading volume decreases, potentially signaling a weakening bearish trend. Conversely, bearish divergence occurs when prices form higher highs while trading volume decreases, meaning crypto prices may soon fall.

Identifying accumulation and distribution

Accumulation occurs when whales or a group of traders accumulate a cryptocurrency asset, leading to increased buying volume and potentially signaling a bullish reversal. On the other hand, distribution occurs when traders sell off a significant amount of their holdings, resulting in increased selling volume, which could lead to a price drop. Volume indicators such as On-Balance Volume (OBV) and Accumulation/Distribution Line (ADL) can help traders identify these phases and anticipate trend reversals.


Popular Volume Indicators for Crypto Price Prediction

There are several volume indicators that can be used for crypto price prediction. However, On-balance volume, the Money Flow Index, Accumulation/Distribution Line, and the Chaikin Oscillator are some of the most commonly used ones in the market today.

On-Balance Volume

Developed by Joseph Granville in 1963, on-balance volume (OBV) is a technical indicator that calculates a cumulative total of volume based on whether prices close higher or lower than the previous period. Rising OBV indicates increasing buying pressure while falling OBV suggests increasing selling pressure. Divergences between OBV and price movements can signal potential trend reversals.

To calculate on-balance volume, you just have to add or subtract the previous day’s volume from the most recent volume, depending on which is higher than the other.

Money Flow Index

Like the Relative Strength Index (RSI), the Money Flow Index (MFI) measures buying and selling pressure. Gene Quong and Avrum Soudack developed it to measure how strong and in what direction money flows in and out of a crypto asset. 

On a trading chart, the Money Flow Index (MFI) is represented by a line that fluctuates between 0 and 100. When the MFI rises, it suggests mounting buying pressure, while a decline in the MFI indicates escalating selling pressure. If the MFI value crosses 80, the cryptocurrency has been overbought.

Conversely, if the MFI value falls below 20, it suggests that the cryptocurrency market is oversold, indicating the possibility of an upward price reversal in the future.

Accumulation/Distribution Line

Accumulation/Distribution Indicator (A/D) for crypto trading and AI
Accumulation/Distribution Indicator (A/D) for crypto trading and AI

The Accumulation/Distribution Line (ADL) checks how much volume of a cryptocurrency or token is being accumulated or sold by traders at a particular time.  It is based on the principle that volume precedes price movements, meaning that changes in trading volume can provide insights into potential movements in price trends.

To derive the A/D value, you must first compute the Money Flow Volume. Subsequently, to find the current A/D, you add the current Money Flow Volume to the previous A/D.

When the Accumulation/Distribution Line (ADL) ascends, it signals an upward price trend, suggesting that most traders purchase cryptocurrency.

On the contrary, a descent in the line indicates the onset of a bear market.

The Chaikin Oscillator

The Chaikin Oscillator is often considered an oscillator more than a volume indicator. However, it is derived from the Accumulation/Distribution Line (ADL) and is designed to identify bullish and bearish trends in the market.

Marc Chaikin developed it, combining price and volume data to assess the momentum of a security. The Chaikin Oscillator is calculated as the difference between the short-term and long-term exponential moving averages of the Chaikin Money Flow indicator.

Unlock Your Trading Potential: Enhance Your Strategy with AI-Driven Crypto Price Forecasts
Unlock Your Trading Potential: Enhance Your Strategy with AI-Driven Crypto Price Forecasts

Conclusion

Volume indicators are great tools for measuring how strong price movements are in the crypto market. Tools like on-balance volume, the accumulation/distribution line, and the Money Flow Index, among others, are indispensable in every trader’s arsenal. Used well, they could help you generate profitable signals to boost your trading portfolio.


FAQ

What is the best indicator for volume?

It’s challenging to pick one specific volume indicator as the best since each has its peculiarities. However, the On-Balance Volume is widely considered one of the best indicators for volume in cryptocurrency trading.

How do you trade with a volume indicator?

You use volume indicators to determine trading activity on a cryptocurrency. This, in turn, informs you about the strength of the current price trend. For instance, if trading volume is high and most traders are buying, it makes for an excellent bullish signal. 

What is a good trading volume for cryptocurrency?

How good a particular trading volume is depends on the circulating supply of the token. If a token has a relatively high circulating supply but a much lower trading volume, it means the current price movement isn’t strong. A good trading volume would match the cryptocurrency’s circulating supply.

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