Volume Masterclass: For Traders
Most Traders have the Volume Indicator just sitting at the bottom of their chart but have absolutely no idea how to use it.
I'm a former Prop Trader and have been trading Crypto for 8 years.
Thank you for taking time out of your day to read this article.
In exchange for your most valuable resource, I'm going to give you everything I know about using the Volume Indicator.
🤓NOTE TO READER: This article isn't just going to be a bunch of theory. I have made sure to include real examples + Tactical Tips that you can implement in your Trading today.
Here are the 5 Lessons you will get in this Article.
🤓NOTE TO READER: I have done my very best to simplify each of these topics.
Let's get started ↓
Lesson 1: What is Volume
Lesson 1 will cover the following:
Limit + Market Orders
Let me give some quick context first. There are 2 types of orders that a Trader can place on an exchange. ↓
The Volume calculation (hint: it's just market orders)
Volume = total market orders (buys + sells) that came through
That's it. It's really that simple.
Where traders often get confused
🤔Confusion 1: "So how do limit orders get involved in volume? If trader1 market buys 1000 coins from trader2, that means 1000 coins executed as market buy and 1000 coins executed as limit sell. So is the volume 1000 or 2000?" → Answer is 1000
Limit Orders are NOT involved in this calculation. ❌
It is ONLY Market Orders that went through. So the volume in the example above will just be 1000.
It is just counting "what is the total # of coins that were executed as a market order", since a market order must be executed in order for some activity in a coin to occur.
🤔Confusion 2: "On TradingView I see red volume bars and green volume bars. Do the red bars mean sell volume and the green bars mean buy volume?"
This is probably the most common thing around Volume that Traders get confused by.
The Red/Green colors on the TradingView indicator are for AESTHETICS ONLY.
❗️TIP: this is why I personally have all my volume bars set to a black color, because it's just a "counting tool".
Whether it's Red or Green literally makes NO DIFFERENCE to what actually happened in the volume.
🤔Confusion 3: "If the price went up, does that mean there were more Market Buys than Market Sells? If the price went down, does that mean there were more Market Sells than Market Buys?" → Answer is "It depends"
SUMMARY OF LESSON 1: "What is Volume"
Lesson 2: Who are the Players and what do they want? (Game Theory)
Lesson 2 will cover the following:
🤓NOTE TO READER: I promise to keep this lesson simple and easy to understand. I will only cover the absolute basics which I still think is quite valuable for Traders. I included this topic because I believe it's worthwhile to think about "where is the volume actually coming from?".
Defining "Game Theory"
Game theory is the study of how people (or players) make decisions when the outcome for each person depends on the decisions made by everyone else.
Why this is a relevant topic for Traders:
The volume indicator can help give a some more context on the behavior of those players, specifically the intensity.
Defining "Positive Sum" and "Zero Sum" games.
Can you imagine trying to win at a game but you have no idea what the rules are or how it works? The chance that you'll do well at playing it are going to be low.
It's important to at least know what kind of game you are playing before you try to play to win.
Some games let everyone win together. Others only reward one side at the expense of the other.
Positive Sum Games (Traders are NOT playing this game) ❌:
Zero Sum Games (Traders ARE playing this game) ✅:
🤓NOTE TO READER: Below is a Thread I wrote about a bunch of different types of advantages (across different categories) that Traders can have over others which can cause them to win more money than they lose over time ↓
Who are the Market Participants (Players) and what do they want?
When playing any kind of game, it is crucial to have at least a basic understanding on who the players are and what their objectives are.
"Know your enemy" - wise philosopher with a long beard.
Let's break down the 3 main different types of market participants, what each of them want and what each of them really don't want ↓
1 ) Exchanges
2 ) Delta Neutral Traders:
3 ) Delta 1 (directional Traders):
If you are a Trader who is entering a trade at a specific price and you need the price to move in your preferred direction to a target, then you will be in the 3rd Category (Delta1).
Since my trading style is trading breakouts and reversals (betting on price moving up/down), then I also am in this category. MOST TRADERS are "Delta1 Traders".
❗️TIP: Delta (Δ) measures how much the price of your position changes when the underlying asset’s price changes. A delta-1 trader has full exposure to price movement. A delta-neutral trader tries to have no net exposure (or as close as possible to "zero exposure") to price movement.
Why this is relevant to us?
semi relevant tweet ↓
So we have a clear understanding of what it is that we want:
The common thing in both of these is "we need other traders". Without other Traders entering or exiting, how is the market supposed to move?
This is why I need to be executing at places where I have at least ONE of the advantages of:
Having these 2 things in the back of my mind helps me with choosing the levels that I want to trade at and also coming up with ideas to take advantage of Traders who took "bad trades".
❗️TIP: After all, it is a zero sum game. You will get paid from the mistakes of others. Thinking about what mistakes happen, how they happen and where they happen can potentially lead to some interesting ideas.
❗️TIP: The more money that is "stuck" in the "wrong side" , the more fuel this is to the fire. Closing out of a losing trade is compulsory if the price keeps moving against them. It will happen either with their stoploss or a liquidation, both of which help push further in 1 direction. The more wrong they are = the more upside potential you have in the trade.
Bonus Relevant Resource #1: ↓
Bonus Relevant Resource #2: ↓
❗️TIP: the more volume that was executed at the extreme part of the "fast spike" = the more fuel for the fire for the price to violently come back down to the origin.
SUMMARY OF LESSON 2: "Who are the Players and what do they want? (Game Theory)"
Trading is a zero-sum game: one trader’s gain is another’s loss.
Market Players:
Key Idea:
Price moves only when others open or close trades.
You profit by acting before others on the same side or against those trapped on the wrong side.
👉 To increase our chance of performing well, we should deepen our understanding with who’s in the game, what they want and how to profit from their mistakes.
Lesson 3: Intra-day Volume Filter
Lesson 3 will cover the following:
Why I use a Volume Filter
As mentioned earlier above, we need other Traders to trade against otherwise we won't be able to make money.
If we're trading in a coin which has literally no volume and no liquidity, we're just going to be shooting ourselves in the foot.
❗️TIP: Liquidity = limit orders on the orderbook. High liquidity coin = lots of limit orders sitting in the orderbook. Low liquidity coin = very few (or small) limit orders sitting in the orderbook.
The actual Volume Filter I use
To prevent jumping into illiquid coins and getting stuck, I introduced the following Volume Filters ↓:
The default volume indicator shows the number of contracts that is transacted, NOT the USD which is being transacted.
This is why I have switched from the default Volume (contracts) indicator to a Volume in USD (VolUSD) indicator. It makes life so much easier.
❗️TIP: "Volume in USD" = "the Volume in contracts" multiplied by the "Price"
Setting up the VolUSD indicator
Below I will show you the instructions of how to set up this indicator↓
Chart Examples
Below I'm going to share 2 chart examples.
❗️TIP: Even if I'm not actually executing trades on Binance, I will still be making the decision if the coin is tradeable or not based on Binance's volume (since they are market leaders for alt perps volume).
How a Volume filter impacts profitability
↑ Let me give some context to the image above
EV (expected value) per trade is where a Trader's profits come from.
I'm not going to go into the details of how to improve each of these 4, but the 1 that a volume filter specifically addresses is reducing average slippage per trade.
If we keep literally everything the same in a trading system but just reduce the average slippage per trade, then the profitability of the strategy goes up.
SUMMARY OF LESSON 3: "Intra-day Volume Filter"
Trading illiquid coins causes slippage and losses. A volume filter prevents that.
Why it matters:
Higher volume = lower slippage → higher expected value (EV) per trade → more profit.
🤓NOTE TO READER: Well done if you've made it this far. There are 2 more Lessons to go. More juicy stuff below ↓
Lesson 4: Volume Structure relative to Strategy Win-Rate %
Lesson 4 will cover the following:
Quick introduction to Momentum and Mean-Reversion Trading
When price comes into a level, there are only 2 things that we can bet on happening:
Having a basic understanding of both momentum and mean reversion can be helpful. This is because the Volume behaves differently for the best momentum trades when compared to the best mean reversion trades.
Increasing/Decreasing Volume Cheat Sheet + Explanations
Some quick context:
Why consistently increasing Volume is GOOD for Momentum (breakouts) and BAD for Mean Reversion (reversals):
EXAMPLE 1: $150K of volume per candle (not increasing)
Let's pretend on the first 1 minute candle there are $100K in market buys and $50k in market sells in an orderbook that is evenly distributed with limit buys/sells. Over the next 60 candles if absolutely nothing changed (same limit order distribution and same # of market buys/sells coming through each 1min) then the price would consistently drift up. This would be linear growth in price.
The volume in this example would be $150K in every candle.
EXAMPLE 2: $150K of volume per candle BUT it is increasing by +11% per candle. (consistently increasing)
Now let's pretend that the volume in market sells is increasing by +1% on each consequent candle and the volume in market buys is increasing by +10% on each consequent candle AND this manages to maintain itself consistently for an entire 60 candles.
Let's also assume that the limit buy/sells are evenly distributed. Throughout those 60 candles, the size of the green candles would continue growing larger and larger. This would be exponential growth in price.
In a real trading environment the distribution of limit buys/sells and market buys/sells is always changing, but this concept still generally holds firm.
If you are entering a Momentum Trade (betting on the level to break), as long as there is no drastic change in the market conditions there will be an advantage with how price reacts to consistently increasing volume (especially if the market buys are increasing) .
🤓NOTE TO READER: If you are someone who uses the TAPE (an aggregator of Market Orders that are coming through on all exchanges), here is a post I made which is pretty relevant to this topic. ↓
❗️TIP: There's nothing "magical" with the Tape tool. It's just a tool which makes Volume Data a little bit easier to visualize.
If we were to take the reverse of all of the above explanations, then DECREASING VOLUME would be BAD for Breakouts (because where is the wild, psychotic action supposed to come from if less and less people are willing to trade?) and GOOD for Reversals.
If the volume is DECREASING after Traders have hit into a Breakout Trade, it means there are less and less people interested in the coin. This can cause the price to stall and naturally, out of impatience, some traders offload their position at breakeven.
Here's a post below where I have tried my best to visualize this ↓
Live Trade Examples 📈
Below I want to show some examples to help with learning and understanding this concept.
🤓NOTE TO READER: Yes I am cherry-picking with examples here. Ignore the results of the trades, instead just focus on how the volume looks like relative to the style of trade taken (momentum or mean reversion).
Example 1: A Momentum Trade with Increasing Volume
^increasing volume over time is generally good for continuation
Example 2: A Mean Reversion Trade with Flat Volume
Ideally I would like to have decreasing volume when trading reversals, but if the price action is really choppy (like in the example above), then flat volume is still fine.
Example 3: Mean Reversion Trade with Decreasing Volume
After the big spike near 1:30 UTC, the volume gradually (and subtly) started decreasing.
Example 4: Momentum Trade with increasing volume
If you were to look at the "slope" of the Moving Average on top of the volume (the blue colored line), observe but its steep slope upwards.
When this is paired with "slow grindy staircase" price action it's often a great sign for continuation in that same direction.
Example 5: Mean Reversion Trade with decreasing volume
After the big spike at 12:30 UTC the volume really started to dry out and rapidly decrease.
Once price finally got to the low of the day, there was a bit of a spike into it but price crawled back upwards shortly after.
Example 6: Momentum Trade with Increasing Volume
This is definitely one of the more extreme examples due to how severely the volume was increasing during that uptrend.
I believe it's important not to think in "binaries" but rather in "continuums".
❗️TIP: The HIGHER THE INTENSITY of the volume increase = the STRONGER THE BREAKOUT
Example 7: Momentum Trade with increasing volume
This is another example where the volume was really wildly increasing while being paired with a really strong trend.
❗️TIP: If the pullbacks in a trend are really "shallow", this often indicates that the trend is STRONG. If the pullbacks are really "deep", then this often indicates that the trend is WEAK.
Example 8: Mean Reversion Trade with decreasing Volume
The volume was increasing as PEPE was violently selling off but after that bit final drop anear 03:00 UTC, the volume started dying out and the price action started getting quite choppy.
Then finally there was a random spike out of nowhere into a level and the volume dried out again, which is generally a good sign for me to go for the reversal.
🤓NOTE TO READER: The above examples should hopefully emphasize the point that increasing volume = good for trading breakouts and decreasing volume (or at least somewhat flat) volume is better for trading reversals.
Summary of Lesson 4: "Volume Structure relative to Strategy Win-Rate %"
Reminder: Think in continuums, not binaries. The bigger the volume increase → the stronger the breakout.
Lesson 5: Bonus Resources
In this last lesson I want to include a bunch of resources which are relevant to how I use the volume indicator with my intraday trading.
📚Bonus Resource #1: Avoiding trading coins which DO meet the volume criteria but actually have an illiquid order book
Sometimes there is wash trading happening in a coin which causes it to meet the volume criteria despite the orderbook not being thick enough.
An immediate red flag is if there is a large price movement WITHOUT a corresponding volume spike that's paired with it.
The reason this is a red flag is if price could travel a large distance with barely any volume executed, then if we execute a large trade in this position we might potentially get screwed to slippage.
We really want to avoid losing unnecessary money to slippage at all costs so it's just better to stay away from these coins.
📚Bonus Resource #2: Early invalidation from volume dropping off while in an active trade
Some context:
As mentioned earlier above in the article, increasing volume is a really great sign for Momentum because if the market conditions do not change, there is a really nice advantage to sitting in that trade because price can potentially go exponential.
However: if the market conditions DO change then I will need to abandon the trade as soon as possible. One really big sign of the market conditions changing is for the volume to dramatically start decreasing while I'm in an active position.
📚Bonus Resource #3: Some statistics on volume spikes
The sample size here is a bit low for this to really be considered "some real good juicy alpha" but I hope looking at these stats inspires you to do your own research on anomalies that can sometimes appear in the Volume.
It makes some logical sense that if you get a "big weird event" (it doesn't have to just be volume anomalies, it can be anomalies in ANYTHING) happen in a coin, that you would also get "big weird price action" that follows.
Collecting the statistics on how many times that anomaly happened and if there are any recurring patterns that follow it can be quite helpful if you plan on Trading for a while.
📚Bonus Resource #4: Double-check for news whenever you see enormous "relative change" in the Volume
If a coin is doing $10k/1min of volume and then suddenly it's doing $1m/1min on average and CONSISTENTLY for several minutes in a row, this is a sign that BIG PLAYERS are entering this coin.
But it's extremely rare for big players to start randomly throwing literal millions of dollars into an illiquid coin that was barely moving before, this often happens whenever there is some big news event related to that coin such as the Founder dumping his coins, the project getting hacked or some other big FUD.
I have found that if I can confirm that the news happens to be some kind of negative FUD that the coin really does feel like it's on "easy mode" to play breakout shorts in.
So in summary here: if I see a huge and consistent increase in the volume I always make sure to double-check if there's any news.
Summary of Lesson 5: "Bonus Resources"
1. Avoid Fake Liquidity
2. Early Exit on Volume Drop
3. Volume Spike Statistics
4. Check for News
👉 In short:
Use volume to spot fake liquidity, detect early invalidation, study anomalies, and confirm news-driven momentum.
CONCLUSION
Once again I would like to thank you for your time and attention as you pushed through this article.
I hope that Volume is no longer this random tool that sits at the bottom of your charts for no reason, but now is actually being put to use in your trades.
If you happened to find this article useful, I've got more articles on my Profile. You're welcome to check them out if you want ↓
