Trading volume is one of the key indicators in assessing the performance of cryptocurrencies, as it reflects the activity and liquidity in the market. But what does it mean when trading volume drops significantly, for example from $750 million to $80 million in a week, while the price remains stable without a significant drop? Is this a positive or negative indicator? This article provides a comprehensive analysis of this scenario, based on the opinions of trading experts and theories from reference books.
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First, what is trading volume and why is it important?
Trading Volume refers to the total value of currencies traded over a specific period of time. This indicator is essential for understanding market dynamics because it reflects the degree of activity of buyers and sellers. As John Murphy says in his book Technical Analysis of the Financial Markets:
> "Volume is price confirmation. If price moves without strong volume support, the move may be short-lived and unsustainable."
Therefore, it can be said that any drastic change in trading volume can give important signals about the state of the market.
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Secondly, what does low trading volume mean?
Low trading volume can have different connotations, depending on the context:
1. Price stability despite low volume: a positive sign
When trading volume drops significantly while the price remains stable, it may be a sign of:
Long-term confidence: Investors prefer to hold the currency rather than sell it. This can be linked to what Richard Wyckoff stated in his trading system:
> “Price stability after a volume decline is often a consolidation phase, as big players wait for the right opportunity to make a move.”
Lack of speculation: This scenario may reflect a withdrawal of day traders and speculators, reducing volatility.
2. Low interest: negative sign
On the other hand, low trading volume may indicate:
Declining market interest: Declining activity may mean that the currency has lost its appeal to investors, especially if it relies on news or events to support its growth.
Poor Liquidity: As Alexander Elder explains in his book Trading for a Living:
> “Lack of liquidity makes it difficult to execute trades well, which creates pressure on the market.”
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Third, what does the decrease in volume have to do with the upcoming big moves?
It is well known that low volume can precede large price movements. This pattern is common in financial markets and is known as the “calm before the storm.” According to John Bollinger, creator of the Bollinger Bands indicator:
> “Weak market volatility is often seen as an early indicator of an upcoming move, as markets tend to move from stagnant conditions to sudden activity.”
In this case, other factors such as news surrounding the currency and general market patterns should be monitored to anticipate the upcoming trend.
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Fourth, how to deal with low trading volume?
As a trader, you can deal with this type of scenario using the following strategies:
1. Careful monitoring:
Don't rush into making decisions based on volume alone. Combine this indicator with price action and other indicators such as support and resistance lines.
2. News analysis:
Look for news or updates related to the currency. Low volume may be the result of specific events such as the end of a period of demand inflation or waiting for the release of a new product.
3. Long-term trading:
If you are a long-term investor, this may be a good time to accumulate currency. As Warren Buffett says:
> "The best time to buy is when everyone is scared."
4. Use of technical indicators:
Use tools such as the Relative Strength Index (RSI) or the Moving Average indicator to confirm your forecast.
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Examples, historical
Bitcoin in 2018:
During a period of stagnation, trading volume dropped dramatically as the price stabilized for a long period before the market experienced a sudden surge in 2019.
Ethereum in 2021:
Trading volume saw a decline for a period as the price stabilized before the launch of the Ether 2.0 update, which led to a significant increase in demand.
Therefore, we can conclude from the above that low trading volume is neither good nor bad in itself. To understand its impact, it must be linked to other factors such as price action, the general market context, and news related to the currency. This scenario can indicate stability or a preparation phase for a major breakout, but it can also be a sign of waning interest and weak liquidity.
Intelligent trading requires a comprehensive assessment, based on observing and understanding details, not just emotional reactions. As Mark Douglas says in his book Trading in the Zone:
> “Confidence in trading does not come from external confirmations, but from your deep understanding of the market and how it works.”