Understanding exactly how cryptocurrencies are trading on a day-to-day basis is critical for properly timing your purchases or sales. One way to approach cryptocurrency analysis and blockchain company analysis is through technical indicators.
These indicators are purely based on data, using past public trades to inform your upcoming trades.
One useful indicator from traditional stock market technical analysis is on-balance volume. This indicator uses basic volume analysis, along with a higher-level comparison of who is actually moving that volume, to give you an understanding of how that stock or currency will move.
But to truly understand what on-balance volume is, let’s start with the common terms used.
The most basic term to understand before looking at on-balance volume is volume. Essentially, volume is how many shares of a stock, security, or market are bought and sold during a set period of time. You can set the period of time to whatever metric you would like.
For example, if you want to know how much volume of Apple stock is moving, you could look at how many shares are sold in a day, a week, or a year. For cryptocurrency, you’ll want to look at how many trades are occurring and how much currency is being exchanged per trade.
On-balance volume is a metric based on daily volume. It’s a running total, meaning that the current on-balance volume is calculated using the on-balance volume from previous days, weeks, and months. There are three simple rules for calculating on-balance volume, which should be done at a set time every day:
1. If the closing price today is equivalent to the closing price from yesterday, the on-balance volume stays the same. Of course, cryptocurrency markets do not close, so calculating closing price is as simple as locking the price at a specific time of day each day.
2. If the closing price today is greater than the closing price from yesterday, the on-balance volume is yesterday’s on-balance volume + the volume from today.
3. If the closing price today is lower than the closing price from the day before, on-balance volume is yesterday’s on-balance volume – the volume from today.
You can use historical data to calculate your initial on-balance volume; simply add and subtract volume using price points over the past week or month, depending on how ambitious you are, and use the end value as your initial on-balance volume.
Using on-balance volume for cryptocurrency
So how exactly can this metric be used to analyze cryptocurrency trends? There are a few different ways you can use this information. First, it can help you confirm market signals. For example, if you believe that the price of a cryptocurrency is increasing, you can calculate the on-balance value to see if it is also increasing. If it is, then you can partially confirm that the price increase is likely to stay.
You can also use on-balance volume to identify reversals. This is done by finding a divergence between price and on-balance volume. If cryptocurrency price is increasing but on-balance volume is decreasing, there is a likely signal that the price of that currency will soon fall. Similarly, if the price is decreasing but on-balance volume is equal or rising, there’s a good chance that the price will soon increase.
While this metric is not an all-encompassing way to read crypto trends, it certainly gives you another tool in your technical analysis arsenal. It’s easy to calculate and helps you identify incoming price trends, and along with other technical analyses can give you a more complete picture of what’s actually going on with that cryptocurrency.
Want to put this into practice? You can sign up for free today at drivemarkets.com and begin trading immediately.
DRIVE Insider is not an investment advisor. We do not provide personalized recommendations or views as to whether a cryptocurrency or investment approach is suited to the financial needs of a specific individual.