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How Volume, Average Volume and Market Cap Can Help Price Action Traders

Estimated reading: 5 mins

How Volume, Average Volume and Market Cap Can Help Price Action Traders


This article references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.

Volume, average volume and market cap are helpful tools in price action trading, practised by noted modern-day traders such as William O'Neil and Mark Minervini.

For easy recall, O'Neil is known for CANSLIM (C - current quarterly earnings; A - annual earnings growth; N - New product or service; S - Supply and demand; L - Leader or laggard; I - Institutional sponsorship; M - Market direction) investing methodology.

On the other hand, Mark Minervini has authored acclaimed books such as 'Trade Like a Stock Market Wizard'.

O'Neil subtly blends key elements of fundamental and technical analyses - two approaches historically used by both short- and long-term investors.

Minervini is better known for 'volatility contraction', where the price swing between support and resistance gets progressively narrow until a breakout happens.

As advocated by O'Neil and Minervini, price action traders mainly track price movement to enter and exit trades instead of looking at the fundamental factors driving price or an array of indicators used in technical analysis.

However, diligently using volume - whose variant is average volume - and market capitalisation (market cap) along with essential concepts such as support and resistance, Volume-Weighted Average Price (VWAP) and moving averages (20-day, 50-day, etc.) can help price action traders reach consistency and profitability.

A significant chunk of retail short-term investors seldom appreciate that consistency preludes profitability. Blindly chasing profitability and ignoring consistency in generating returns (however minuscule those may be) - which results from experience, skill, discipline and patience - effectively explains why 96% of retail traders end up making losses.


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Volume Is Crucial

Volume is a key pointer that can help price action traders immensely. Simply put, volume is the number of shares traded in a specific period - hourly, daily, weekly, etc. - depending on the time frame tracked by traders for entering and exiting trades.

Participation by institutional investors is crucial in driving the share price up or down. Active involvement of institutional investors translates into a spike in volume, which, in turn, pushes the price up or down.

Usually, during an uptrend, the price keeps bouncing back from certain resistance levels breaching, which would result in a breakout.

Similarly, during a downtrend, the price keeps hitting certain support levels.

However, a breakout - either upwards or downwards - without significant volume indicates limited participation from institutional investors and hence is likely to fizzle out eventually. Therefore, looking for breakouts supported by significant volume can help traders make winning trades.

Enhanced volume indicates noteworthy events with the coin, such as an impressive earnings release, a good product launch, closure of a loss-making division, resolution of a long-pending legal tussle, etc. That makes traders euphoric about that coin.

Conversely, higher volume can happen on the downside. E.g. aggressive selling resulting from lower-than-expected earnings, an announcement of government regulation hampering a project's prospects, the sudden demise of someone instrumental in driving the firm's growth, etc.

Volume can also signal a price reversal. For instance, if the price is trending up, but volume is declining, it reflects the lesser interest among participants to push the price further up, thus pointing to an impending pullback or reversal.

Increasing price movement supported by growing or sustaining volume enhances traders' conviction to remain in the trade and make more significant returns. The higher volume also provides an opportunity for traders to employ pyramiding and significantly enhance returns.

Pyramiding is making more significant returns by adding to winning positions. For instance, if one wants to buy 1000 shares, they can do so by snapping up lesser quantities of 200 or 300 via multiple entries, thus leveraging the sustained price movement but escaping the chances of being battered by sudden drawdowns.


Average Volume Helps Avoid Volatility

The average volume is the cumulative volume in a certain period divided by the number of bars or units of time in the period. For instance, if one is tracking daily candlesticks,  then a month's average volume would be the total volume that month divided by the number of days in the month. A stock with high average volume points to significant liquidity. That is, traders would be able to enter and exit trades instantly, which would help avoid slippage.

Slippage happens when traders get a different trade execution price than what they are looking for.

On the other hand, low average volume can lead to enhanced volatility. That is, a limited number of orders placed at different intervals may result in significant price movements when executed.

While volatility helps participants make winning trades, excessive fluctuations can be detrimental. Tracking average volume can help avoid making trades in excessively volatile stocks.

In essence, lower average volume reflects a diminished interest of participants in a particular coin, resulting in narrow price movements which are difficult to be traded.

Therefore, professional traders prefer periods when the volume is high and coins with higher average volume to capture higher price movements and better returns.


volume, average volume and market cap
The top five cryptocurrencies by market cap as of 14:55 04/02/22. Source: CoinMarketCap.com

Large Market Cap Means Liquidity

Market cap indicates the cumulative market value of a cryptocurrency. It is calculated by multiplying the price of a single coin by the circulating supply.

For example, a cryptocurrency with 50,000 circulating coins at USD 10 each will have a market cap of USD 500,000.

Coins with a market cap over USD 500 million bears a 'large cap' tag, while those between USD 100 million to USD 500 million are mid-cap. Under USD 5 million could be considered a small-cap. The "exact" cut-off depends on the analyst.

Cryptoassets with a large market cap offer ample liquidity. Investors looking for liquidity prefer to pick coins with a higher market cap which excludes unminted coins, measuring only those available for trading in the market.

Higher liquidity allows investors to enter and exit trades faster. Lower liquidity, on the contrary, results in enhanced volatility which hampers traders' ability to execute trades at specific price levels.

Market cap indicates how the market values cryptocurrency. Small-cap coins are at the early stages of their growth and may have greater potential for generating robust returns though they are saddled with enhanced risk. On the other hand, large-cap coins may promise less growth potential but have longer track records and added liquidity.



Thus, blending the signals from the volume, average volume, and market cap of a coin can be a prudent way to minimise excess volatility and limited liquidity, both of which can hamper traders from making consistent returns.

About the author:

Jojo Kalimuttam is a writer who avidly tracks cryptocurrencies, technology, the startup ecosystem and the broader financial markets. When he is not jogging as a means of unwinding, he enjoys listening to Beethoven, Yanni and Dirty Loops.


The above references an opinion and is for informational purposes only. Do not take this as personalised financial advice or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.


Last updated: 04/02/2022

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