In the financial markets, especially in the cryptocurrency market, understanding the relationship between price and trading volume is crucial. Let's start with the basic concepts:
Price:
Price can be measured from four aspects: opening price, closing price, highest price, and lowest price. Among these prices, the closing price is the most important as it represents the market consensus at the end of the trading day.
Volume:
Volume directly reflects market participation. Changes in volume showcase how funds flow in and out of the market, providing a window into market sentiment and activity levels.
How is price formed? Price is the result of an agreement reached between buyers and sellers during the trading process. Its formation is a direct manifestation of supply and demand relationships:
Buyer (Demand Side): Tends to buy at low prices, which is shown through limit orders or active bidding.
Seller (Supply Side): Wishes to sell at high prices, represented by limit orders or active quoting.
In the cryptocurrency market, prices are primarily matched through **Order Book or Automated Market Maker (AMM)** mechanisms.
Key Volume-Price Principles:
Price Up, Volume Up: When the price rises and trading volume increases simultaneously, it usually indicates that the upward trend may continue.
Price Down, Volume Up: A price decline accompanied by an increase in trading volume indicates strong bearish forces, and the market may continue to decline.
Price Up, Volume Down: A price increase with decreased trading volume may indicate weakening buying pressure.
Price Down, Volume Down: A price decline accompanied by reduced trading volume may signal that the downward trend is nearing its end.
Volume-Price Relationship Model:
Volume Breakout Model: When the price breaks through a key level, if accompanied by a significant increase in trading volume, it is usually considered a valid breakout.
Volume-Price Divergence: If the price reaches a new high or low but the trading volume does not increase accordingly, it may indicate a trend reversal.
Stagnation Phenomenon: During the process of price rising or falling, if the trading volume significantly shrinks, it indicates insufficient trend momentum and may face a reversal.
Classic Volume-Price Characteristics: In different candlestick patterns and trends, volume-price characteristics also provide important judgment criteria:
Breakout Pattern: An effective breakout is usually accompanied by increased volume and rising price. If the trading volume does not significantly increase during the breakout, it may be a false breakout.
Pullback Confirmation: If trading volume shrinks during a price pullback, a subsequent increase in volume and price after the pullback often serves as a confirmation signal.
Consolidation Pattern: In a price oscillation range, the trading volume gradually decreases, indicating that the market is waiting for a breakout direction.
Recommended Reading:
If you are interested in volume-price analysis, you can read the book (Volume Price Analysis) written by Anna Coulling. She combines the market interpretation methods of Wyckoff, the founder of volume-price analysis, to provide in-depth insights.
Mastering these basic concepts and models can greatly assist us in making more informed investment decisions in complex market environments.