Embarking on a journey in the world of cryptocurrency with just $500 and achieving financial freedom is a story worth telling. While many trading influencers charge exorbitant fees for courses, here's a guide that will cost you nothing but your time. Let’s delve into the Volume Guide and how you can build a profitable trading strategy with it.
Understanding Indicators
Traders often view indicators as magical tools for predicting price movements. However, this is a misconception. If you don’t understand how an indicator is calculated, you shouldn’t rely on it. Indicators are merely visual aids for price data and come in two primary types:
1. Price-Derived Indicators
These indicators use candlestick data in their calculations. The most common ones are:
Moving Averages: The mean of the close prices from the previous x candles.
RSI (Relative Strength Index): Measures the speed and change of price movements.
Bollinger Bands: Measures market volatility and provide relative definitions of high and low prices.
Example: Moving Average
Moving averages help identify trends, general market structure, and continuations.
Full Moving Average Guide:
2. Counting Indicators
The formula used for these indicators is based on different data sets, not candlesticks. Examples include:
Volume: Calculated by counting total transactions.
Liquidations: Calculated by counting total liquidations.
Open Interest: The total number of Longs plus Shorts.
Volume Masterclass
Volume is a crucial indicator in trading, calculated by counting the total number of contracts being traded.
Example: Volume Bar
A volume bar showing 2.628 million contracts traded over 4 hours (4H chart) doesn’t mean more buyers than sellers, as each buy order needs a matching sell order.
An increase in volume indicates more market participation and higher volatility.
How I Trade with Volume
Low Volume: Indicates low speculation, with steady prices and volume. This is where I often play the continuation of trends.
High Volume: Indicates more market participants and increased volatility, which I use to play breakouts.
Market Participants and Volume
Understanding who is trading and why is essential. Market participants might be driven by:
- News about an asset
- Major unlocks
- BTC breaking out
- Economic data releases
- Celebrity endorsements (e.g., Elon Musk)
This leads to two types of price action:
Standard Price Action: Stable but can be low liquidity, with trades taking longer to play out.
Anomalies: Occur with increased market participants, represented by outlier volume bars, and characterized by high volatility and liquidity.
Trading Strategies with Volume
Traders use various strategies to navigate different volume conditions:
Anomalies and Swing Failure Patterns (SFP)
Some traders wait for volume-based anomalies and SFPs to counter-trade the direction of price.
Mean Reversion Trading
For mean reversion traders, outlier volume bars can trigger trades on tokens that spike unexpectedly, with the expectation that the speculation will die out, participants will exit, and the price will revert to the mean.
Volume-Based Confluences
There are numerous volume-based confluences traders can utilize. Here are a few that I will cover in upcoming guides:
Mean Reversion Trading
Swing Failure Pattern (SFP) Guide
Volume Divergences
Strength Buying vs. Strength Selling
Stay updated by joining me for first access to these guides: https://bitly.cx/BmLHk
Sentiment Analysis through Game Theory
Using game theory to understand absorption or resistance at key levels aids in sentiment analysis:
Example: $2M in market buys hitting a $5M limit sell wall and getting absorbed.
Red volume bars show stronger sell pressure, making buyers cautious or bearish, likely leading them to exit their positions.
This sentiment shift can prompt sellers to step in with more shorts.
The Role of Volume
While volume is more than a visual aid, it's still not a predictive tool for price action. No such indicator exists. It requires testing and journaling like any other indicator.
Conclusion
By understanding and leveraging volume, you can develop a robust trading strategy. Remember, no indicator is foolproof, and continual learning and adaptation are key. I hope this guide enhances your understanding and helps you on your journey to financial freedom.
Stay tuned for more detailed guides and insights.