To analyze digital currencies, there are different indicators that traders should analyze by comparing and measuring them and finding the right time and amount for trading. Market value or market cap is one of these indicators. Another indicator that traders use is the trading volume. Trading volume is the total amount of shares or contracts traded for given security. All securities and valuable assets bought and sold in different trading markets have a trading volume. This scale is measured for stocks, bonds, futures, and commodities. This article will examine the volume of transactions and market cap in the digital currency market.
Definition of trading volume
To understand this concept more efficiently, we present several definitions. The total number of shares or contracts exchanged between buyers and sellers of security during trading hours in a day is called trading volume. The measurement of activities related to buying and selling and market liquidity in a certain period is called the volume of transactions. With these definitions, we understand that a higher trading volume is better than a lower volume; Because it means more liquidity and better execution of orders in the market.
Investigating the concept of transaction volume
As we mentioned, trading volume measures the total number of shares or contracts traded for a given asset over a given time. It can be said that the volume includes the total number of shares traded between the buyer and the seller. When users become active in the market and the number of transactions of an asset, including digital currency, increases, the transaction volume of that asset increases. When the activity in the market decreases and transactions related to securities decline, the volume of transactions will also decrease. The volume of asset transactions reaches its highest level near the market’s opening and closing, the beginning of the week, and the last day of the week.
The method of using the trading volume index
As we mentioned, trading volume is a measure of the trading volume of a specific financial asset in a period. For stocks, trade volume is measured by the number of shares traded. Future trade volume is determined by the number of contracts that have been dealt with. Traders look at trading volume to determine liquidity and combine its changes with technical indicators to make decisions about trading the assets in their portfolio.
Over time, looking at trading volume patterns helps traders identify and invest in solid assets. Traders use this indicator to find out how much market confidence there is for a digital currency asset, thus gaining a general understanding of the supply and demand of the asset. Trading volume plays an essential role in technical analysis and plays a prominent position among some critical technical indicators, and some key indicators of technical analysis are determined according to this number.
Three important indicators of trading volume
Each indicator uses a different formula, and traders must find the indicator that works best for their particular market approach. Nevertheless, indicators can help the trading decision process. There are many volume indicators to choose from, below are how to use a few of them.
1. Balanced Volume (OBV)
Volume on Balance (OBV) is a simple but effective indicator. OBV starts with an arbitrary number and is subtracted when the market ends at a higher or lower price. This trend shows which stocks are accumulating. This process can also show divergences, such as when the price increases but the trading volume increases at a slower rate or even starts to decrease.
2. Chaikin money flow
Rising prices should be accompanied by increasing trading volume, so Chaikin Money Flow focuses on rising volume when prices close at the upper or lower part of their daily range and then provide a value for the corresponding strength. Values will be high when prices are in the upper part of the daily range and volume increases. Also, the values will be negative when the prices are in the lower part of the range. Chaikin Money Flow can be used as a short-term indicator because it fluctuates, but it is mainly used to observe divergence.
3. Klinger oscillator
Oscillations above and below the zero line can be used to aid other trading signals. For example, the Klinger Oscillator aggregates accumulation (buy) and distribution (sell) volume for a given period.
Determining the strength or weakness of an asset based on trading volume
When analyzing trading volume, there are usually guidelines for determining the strength or weakness of an asset’s price trend. As a result, traders are more inclined to join strong moves and try to avoid entering them by identifying weak trends. In the following, we will point out instructions that help identify trends with the help of trading volume. Of course, these guidelines do not hold in all situations, but they provide general guidance for trading decisions.
1. Process Confirmation
A growing market should see an increase in the volume of transactions. Buyers need increasing numbers and enthusiasm to buy more assets to raise prices. An increase in price and a decrease in volume may indicate a lack of interest among traders, which is a warning about a possible reduction in price. This recipe may sound a little hard and boggle your mind, but the simple fact is that price declines or rises in the low volume are not strong signals. A fall or rise in price on high volume is a stronger signal and indicates that something has fundamentally changed in the stock.
2. Depreciation movements and volume of transactions
We can see wear and tear movements in a rising or falling market. Exhaustion movements are extreme price swings accompanied by a sharp increase in trading volume that indicate the potential end of a trend. Participants who wait and fear missing out on more swings pile up at the top of the market, exhausting the number of buyers. At the bottom of the market, falling prices drive many traders out of the market, and the market becomes more volatile. Of course, the withdrawal of traders from an asset’s market reduces its trading volume, but whether the change in volume continues in the following days, weeks and months can be analyzed using other trading volume guidelines.
3. Ascending signs
Trading volume can help identify bullish signs. For example, imagine a situation where the price is trending down, but the volume of market transactions is increasing daily. This is a bullish sign, and in the coming days, the bearish trend will probably end, and the price will rise. If the price does not decrease from the previous lowest level in the downward movement and if the volume declines in the second downward trend, it indicates a possible rise in the market in the coming days.
4. Changing the trading volume and price
After a long-term movement of price changes, if the price changes with a slight slope, but the changes in the volume of transactions are significant, it is probably a sign of a change in the reverse trend, and finally, the price will decrease or increase following the volume of transactions. If the price goes down with a low slope but the volume of market transactions increases, the market will probably rise in the coming days.
5. Volume of transactions and false failures
Boosted trading volume indicates strength in the price trend on the initial breakout of another range or chart pattern. Conversely, a slight change in the volume of transactions or a decrease in the number of transactions during a failure indicates that traders are not interested in the market and increases the probability of a false failure.
6. Trading volume history
The volume of the transaction should be checked against the recent date. Comparing today’s trading volume with trading volume 50 years ago provides irrelevant data. The more recent the data set, the more accurate the results will be, which will match the current market conditions. Trading volume is often considered an indicator of liquidity, as stocks or markets with the most volume are the most liquid and are considered the best for short-term trading. In these markets, many buyers and sellers are ready to trade at different prices. So far, we have explained everything you need to know about trading volume. Now let’s explain another digital currency analysis indicator, market cap.
What is the market cap?
Market cap is the result of multiplying the financial value of a token or coin by the number of currencies currently circulating in the market. This scale is essential in many ways, and many traders use it in trading strategies and market analysis. In the digital currency market, there is another scale called Fully Diluted Market Cap (FDV). FDV scale is calculated based on all mined tokens of a cryptocurrency, not just the tokens currently circulating in the market. In other words, FDV can determine the actual value of a digital currency, which may be higher or lower than its current market cap. One of the signs that Bitcoin is doing well is that its FDV is 21 million units. These statistics show that Bitcoin is an asset that has intrinsic value because the number of its coins is limited, and each currency has a good profit. One of the essential advantages of a market cap is that it can determine the stability of a digital currency; Tokens and currencies with a higher market value indicate a greater demand for their purchase. Thus they have higher strength for investment.
Find the correct token to invest in using the digital currency market cap
The best digital currency to invest in is one whose future is better than the statistics in its past charts. In this section, we can use the market cap of Bitcoin as an example; The price of this digital currency on January 1, 2015, was around $320, and its market was worth $4.32 billion. After five years, in 2020, the price of Bitcoin reached $7,196, and its market value became $130 billion. This number increased again, and the market value of Bitcoin experienced an 8-fold growth in one year. Traders can find currencies with high growth potential with the help of Market Cap. According to this scale, beginner investors can also learn about the pitfalls of fraud in the digital currency market. A token with a high market value is very unlikely to be a scam project. This scale is one of the most reliable and valuable data that traders can use.Influencers active in the field of digital currencies also use this scale for their analysis. Of course, this does not mean that traders can trade in the market only by relying on the information they get from the market cap. Instead, they have to evaluate various indicators to choose the correct currency.
The difference between market cap and volume
Trading volume is an entirely different concept from market cap. The trading volume of a digital currency refers to the number of tokens or coins traded during a day. So the market volume varies daily, but the market cap may remain constant for some time.
Trading volume is a valuable tool for studying trends, and there are many ways to use it. Fundamental guidelines can be used to assess market strength or weakness. Also, with the help of these instructions, it is possible to check whether the trading volume confirms the price movement or is a sign of a reverse direction. Sometimes indicators based on trading volume are used to aid the decision-making process. In summary, while trading volume is not a precision tool, entry and exit signals can be identified by looking at price action, trading volume, and the trading volume indicator. Market cap is the result of multiplying the financial value of a digital currency by the amount of currencies circulating in the market.
This scale is significant in various aspects, and many traders use it in trading strategies and technical analysis. The TOBTC website aims to increase traders’ awareness in the financial markets so that everyone who intends to invest in this market can benefit. Following in our blog, you can benefit from updated and helpful information for investing in the financial markets. You can also share your questions, comments, and suggestions with us through the comment section or on social networks.