Trading volume: an essential guide for beginners

In the field of financial market analysis, many novice traders tend to focus exclusively on price fluctuations. However, to truly understand the strength of a trend or detect potential changes, trading volume stands out as a fundamental indicator. Let’s simply explain what volume is and how it can be used to support your investment decisions in crypto assets, even if you’re just starting out in this world.

Definition of the Volume Indicator

Volume is nothing more than the amount of assets (cryptocurrencies, stocks, etc.) exchanged within a specific time frame. It reflects how many units of an asset have been bought and sold. High volume suggests that many participants are trading that asset, while low volume indicates less interest in the market at that particular moment.

The Relevance of Volume in Trading

Volume helps validate whether a price movement is genuine or false. Imagine the value of a cryptocurrency is rising but the volume is low; this could be a warning sign. A bullish rally without volume support might be merely temporary and lack genuine buyer interest. In other words, volume acts as a “backstop” for the direction the price is taking.

Additionally, volume is crucial for anticipating potential trend reversals. If the price of an asset is increasing but volume begins to decrease, it could indicate that the strength of that rally is weakening and a correction might be imminent.

The Role of Volume in Breakouts

One of the most critical moments to examine volume is during a resistance or support breakout, known as “breakouts.” Resistance represents a price level where the asset typically stops its ascent and pulls back, while support is a level where it usually halts its decline and bounces back. When the price surpasses these levels, a significant change in market dynamics is expected.

However, for this breakout to be considered solid and reliable, it must be accompanied by an increase in volume. If the price breaks resistance but volume remains low, the movement may not hold, and the price could end up retracing below the resistance.

Practical Example of Volume and Breakout

Suppose Gate is trying to surpass the resistance of $70,000. If during this breakout the transaction volume increases significantly, it suggests strength in the movement, as more investors are acquiring the crypto asset, trusting in a future appreciation. But if volume does not increase in line with the price, it could indicate a lack of conviction in the move, and the price might fall back.

How to Use Volume to Avoid Mistakes

Volume can be a valuable ally in avoiding wrong decisions in the market. Imagine you’re observing an upward trend in a cryptocurrency, but notice that volume is decreasing. This could indicate that the rally is losing momentum and the price might start to fall soon. In this scenario, you might choose not to enter the trade or, if you’re already in, adjust your stop-loss to protect your Principal.

Recommendations for Incorporating Volume into Your Trades

1. Always analyze volume together with price: volume alone won’t give you all the answers. It should be used alongside price analysis and other indicators to get a more complete view of the market.

2. Watch for divergences: when price and volume move in opposite (for example, the price rises but volume falls), it can be a warning sign of a possible reversal.

3. Use volume to confirm breakouts: if the price breaks an important support or resistance, check the volume to determine if the move has strength. A breakout with low volume could be misleading.

4. Manage your risks: even when using volume as an indicator, the crypto market can be unpredictable. Always set a stop-loss to protect your Principal and avoid investing all your money in a single trade.

The volume indicator is an invaluable tool for any trader, whether beginner or experienced. It helps confirm trends, identify genuine breakouts, and anticipate price reversals. When combined with solid price analysis and other indicators, volume can significantly increase your chances of success in the market.

Keep in mind: there are no eternal rises or endless falls. Volume is a key piece to understanding these fluctuations. Stay calm, manage your risk properly, and never enter the market impulsively. The crypto market offers many opportunities, but knowing when to enter and exit is crucial.