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Published On: Jun 26, 2024
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Crypto Volume Trading: Overview, Benefits and Potential Risks

Volume Scalping: How to Use Volume and Market Liquidity to Trade Better

Introduction to Scalping

Scalping is a trading technique in finance markets that profits from buying and selling extremely fast. A trade in this modality does not last more than a few minutes. Associated with high-frequency trading, trades, in this case, last just seconds.

It was born out of the desire to take advantage of fast-paced price changes in a financial instrument. Scalping is, overall, the riskier environment in any market to make profits from.

Profiting from fast-paced but small price movements requires an enormous capital margin because scalping does not look for an extended price run. 

In combination with the risk factor, this brings the concept of 'leverage' to the table, multiplying the margin that the trader has available to trade as if it has more, increasing the size of a position in the market. 

So, winning more implies losing more, but since the trader does not have the traded margin, what happens is that its position will multiply in an accelerated way.

The last is the key to understanding liquidity in the context of scalping: the accelerated injection of capital in the market through the closing of leveraged positions. It will also increase the market volume, which measures the net quantity of transactions entered into the market.

How to Use Volume and Market Liquidity to Trade Better

Foundational Concepts in Market Liquidity

The injection of high amounts of money in the market increases its liquidity. As we mentioned, one manner is through leveraged positions. A liquid market can move substantially through its historic price range or even, if the market decides, to reach new highs or downs.

Another way of making a market liquid is the deliberated activity by large institutions that have enough money to move the price of an asset without leveraging it. In the context of the cryptocurrency market, a whale would have enough coins to affect the supply of the market of the coin it holds.

One key metric used in scalping trading is the volume. The volume presents itself in different variants that we'll cover further in this article.

Other metrics to look at:

  1. Rate of change of an asset price.
  2. The average price range over historical periods.
  3. Volatility and its variants over daily and weekly frames.

As we have addressed before, liquidity has different reasons. It could be incentivized by closing orders or deliberate actions from big players. But how does it vary over time?

Seasonal liquidity relies on mid-term aspects of an asset: announcements, updates, project news, and so on.

Daily liquidity is dependent on the day trading activity of the market. It refers to daily high and low breakouts, institutional trading, news releases, etc.

Event-driven liquidity is generated by (commonly) unexpected events related to an asset. War is an example. In the cryptocurrency world it is common for public figures to lead price events by their single participation in the public sphere.

Foundational Concepts in Market Liquidity

Volume Analysis: The Scalper’s Toolbox

Understanding volume indicators is crucial to taking action in the market at the right moment, putting the probabilities in the trader's favor. Volume measurements signal when the big players and money are entering the market. For a scalper, this is important when taking advantage of fast-paced directional movements of the price action.

  • On-Balance Volume (OBV): this is a measurement of how much pressure there is accumulated on the buying and selling sides. Changes in this indicator suggest a change in the upcoming price.
  • Volume Oscillator: it does a lecture between two moving averages to display a result on a percentage scale. When support is broken out during increasing volume, a signal of a continuous move takes place. In the resistance case, it indicates high buying activity.
  • Accumulation/Distribution Line: studies the flow of money in the market trying to spot divergences according to price action and volume activity. It can be used to detect weakening trends and strengths.

A professional scalper typically waits for high-volume activity to make trades. One example is those that work the opening of a market: almost every time a session starts there is a 'range expansion move'; this is a move that looks for the highs and lows of previous price action, zones where stop-losses are placed, hence liquidity is contained.

During this time volume tends to peak high, and scalpers identify this situation as an opportunity to look for fast entries and exits. The indicators previously described excite their values, spotting signals rapidly.

Integrating Volume with Other Technical Indicators

Volume indicators like the VO or Distribution/accumulation work perfectly well to identify starting and ending trend points as well as weakening and strengths zones.

  • Moving Averages: when the price is moving in a continuous direction at the time volume is increasing, a scalper could seek a trend trading entry when there is price action near the MA lines. Conversely, when the volume is decreasing and MA lines cross, could be a signal of a reversal move of the price action.
  • MACD (Moving Average Convergence Divergence): this indicator can provide information about overbought and oversold situations. MACD displays a histogram which helps to spot these levels. In combination with volume, a scalper might seek for correlation between the histogram and volume, seeking for entries where there are overbought or oversold zones with decreasing volume activity.
  • Stochastic Oscillators:  similar to MACD, stochastic is a momentum indicator that aims for overbought and oversold levels. Stochastic would be excellent for spotting divergence in a trending move. When the price is going in a certain direction accompanied by volume but stochastic begins to aim in the contrary direction, a scalper might be in front of a divergence signal.


Integrating Volume with Other Technical Indicators

One of the most useful ways to approach scalping is by looking at different time frame screens. This helps scalpers establish a convergence correlation between the price action of candlestick patterns across multiple charts.

To develop a strategy the scalper needs to choose some recognizable chart patterns and try to establish a correlation between a 3-minute chart and a 5-10-minute chart, for example.


Advanced Scalping Techniques

Since scalping is a sophisticated trading method, it adapts well to several market conditions. Scalpers can adapt to changing markets by the use of indicators along with chart patterns.

Scalping along with volume can serve as a tool to place entry orders, and identify exit points, and position sizes. 

  1. In a low-volume market, where the price path is not so volatile, a proper position might require a lower size and a smaller stop-loss as well as an adjusted take-profit.
  2. A high-volume market will move the price in a broader trajectory, this situation would be beneficial for a higher position size if it is handled properly according to risk management principles.

Note regarding my first statement: what I meant is that in a low volume market If a trader wants to make substantial profits would need to increment his position size as the price does not move significantly; it is true that selling such positions would be harder for a large capital but I guess this idea would depend on the audience reading this. Low capital traders tend to leverage when the price does not move notably to get the same profits as it would in a high volume market when the price does move significantly. This same logic went for the 2nd point. ;)

The fast movement sought by scalpers would need rapid decisions. When scalping in the crypto market, the scalper may use the order books to see which price remains strong at a certain level. 

This approach may come accompanied by market order types to ensure entries at a specific price.

Risk Management in Scalping

An ideal risk-reward ratio for scalping trading would be 1:2 or 1:3 since a trader in this mode could execute several trades during a session. This ensures collecting gains fast when a position is winning.

Stop-loss and take-profit are mandatory in scalping, mostly for inexperienced trading in this mode. Avoid big losses and missing profits by including these types of orders.

Setting a trading plan that contains a contingency rule may help traders to not fall into revenge behavior and overtrading the market when they are unable to manage emotions in the face of losing trades.

Risk Management in Scalping

Is Volume Scalping Right for Your Trading Personality?

So far, scalping comes with stressful and under-pressure environments. In this case is important to have a trading plan that guidelines the strategy to use so when no entries are spotted the scalper could take a rest from the market for a moment.

The best way to achieve high-efficiency in scalping is to backtest a strategy so the trader knows exactly what to do and expect from the market.

A scalper, before all, must know his emotional strength and risk tolerance to be able to adapt to a trading plan, achieve high-efficiency, and be disciplined.

Conclusion: Building a Scalping Mindset

Every scalper must aim to develop:

  1. Psychological strength.
  2. Quick decision-making process.
  3. An "eye-of-tiger" to identify liquidity levels rapidly.

To continue learning, an aspirant to scalping can visit Altrady's Library which teaches all about crypto markets and indicators.

To carry with structured ideas of what a trader wants to achieve as a scalper will help to focus on sustainability despite the fact this method is extremely short-term.