Welcome to the final part of our Technical Indicators course.
💎 Today, we will focus on Volume and Open Interest.
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Welcome to Part 3 of our Technical Indicators course.
GOAL: Start using technical indicators in your crypto trading and investing
EFFORT: 15-30 mins to get started with each indicator
REWARD: Potentially unlimited upside if you can master an indicator
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🔺 And, when you’re ready, let’s continue our journey.
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🔹 Volume and Open Interest: Explained
Let’s begin with some simple definitions and interpretations:
Definition ➡ the total number of coins exchanged during a given period of time
Interpretation ➡ a metric that shows total trading activity: how many trades have happened during a given period of time
Definition ➡ the total number of outstanding longs or shorts in the market (aka total number of contracts)
Interpretation ➡ a metric that shows whether money is actually flowing in or out of the market.
Now we have a vague understanding, we can put it together in a hypothetical scenario:
Phase 1: Koroush AK creates a contract to sell $ETH and Market Meditations buys that contract. Koroush AK has made a new contract and one trade has occurred. A trade has occurred because there was a buyer and seller of a contract. So in this instance both Open Interest and Volume go up by 1.
Phase 2: Market Meditations has made money off the $ETH bought from Koroush AK and decides it’s time to sell it to Koroush AK47. In this instance, no new contract has been made, so open interest stays the same but volume goes up by 1 again because a trade has been made. Why is open interest the same? Market Meditations has left the market and Koroush AK47 has joined the market, hence no new money has flown in. This is a crucial difference between Volume and Open Interest.
The below table considers all possible scenarios and the implications for Open Interest and Volume.
🛑 Volume and Open Interest: Using them to Trade
FTX provides data on 24h Volume and Open Interest. Simply navigate to the contract you want to view and you will see the information on the right hand side of the screen. Continuing from the example above, we’ve taken a screenshot from FTX ETH-PERP at 14:20 BST.
If you are trading an asset rather than a contract, you’ll still have 24h Volume but you won’t find data on Open Interest.
Volume and Open Interest applied to Trend Analysis:
1️⃣ Volume Increasing, Open Interest Increasing. Suppose we believe we are in an uptrend (price is forming higher highs and higher lows) and we can see that both Volume and Open Interest are increasing. Well, this means that the total trade activity is increasing and the number of participants in the market are increasing as well. In other words, there is an increase in both demand and interest in whatever asset is being traded. So, open interest and volume agree with our analysis that we are in an uptrend so the implication is that we have a strong uptrend.
2️⃣ Volume Decreasing, Open Interest Decreasing. Imagine the opposite is true. We believe we are in an uptrend but Volume and Open Interest are decreasing. So trading activity isn’t increasing despite the increase in price and new participants are not entering the market. The metrics disagree with our analysis and so the implication is that we have a weak uptrend. From this we might infer either that the price is going to reverse soon or it’s not going to move very far.
3️⃣ Volume Increasing, Open Interest Increasing. Now let’s suppose we believe we are in a downtrend (prices are forming lower highs and lower lows) and both Volume and Open Interest are increasing; the number of market participants are increasing and trading activity is confirming that we are in a strong downtrend.
4️⃣ Volume Decreasing, Open Interest Decreasing. Finally, if we are in a downtrend and Volume and Open Interest are decreasing, participants are leaving the market and therefore we are in a weak downtrend. We expect it to reverse quickly or not last a very long amount of time.
🟪 Volume and Open Interest: Using them to Identify Liquidity
Now we know how to use Volume and Open Interest for trend analysis, let’s move on to using them to identify liquidity. Volume and Open Interest are useful tools for ensuring the market has enough liquidity to support our orders. It becomes very difficult to navigate the market when there’s no one to take the other side of your trades. Especifically when you start trading with larger position sizes.
This can be very useful when selecting from multiple similar behaving assets. For example, in the altcoin market where there are a lot of similarly behaving assets, determining liquidity is one of the best ways to choose which one to trade. Look for the high-volume pairs; the ones that have a lot of volume are easier to navigate and get large position sizes filled on. For a step by step guide on how to use liquidity to identify which altcoins to trade, we have the following resources: Find the Best Altcoins to Day Trade 📺 and Finding Gems 📩
🟢 Volume and Open Interest: Concluding Remarks
And thus concludes the final chapter of our 3 Part Technical Indicators course. Remember, take no single indicator in isolation. Consider the process whereby you make a trading decision or strategy a puzzle. Volume and Open Interest are but one piece of the puzzle. You’ll want to consider a range of other factors to complete the puzzle, including but not limited to: other technical indicators, risk management and trading psychology. All things we will be releasing future guides on.
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Vitalik Buterin Donates $1 Billion
Vitalik Buterin, cofounder of Ethereum, donated over $1 billion to the relief fund in India, which has been noted down as one of the largest ever individual donations. Let’s look at the details. Buterin transferred 500 $ETH and more than 500 trillion $SHIB (which Buterin was initially gifted) worth over $1 billion at the time of the transfer. Here is his address if you’d like to see the transactions on Etherscan for yourself. One feature of blockchain is that all transactions are transparent and therefore available for anybody - including you - to see and track. In this case, people noticed Buterin had transferred such a meaningful amount of money, inciting panic among some investors who assumed that the relief fund would immediately liquidate the coins, causing significant selling pressure short term.
This in turn led to a ≈54% dump of $SHIB, even though Sandeep Nailwal, cofounder of Polygon and the Indian relief fund, stated they will “convert the donation slowly over the period of time” so “the retail community involved with SHIB'' is not adversely affected. If you want to learn more about tokenomics and how such tokens like $SHIB are created, distributed, sold, and circulated, then check out Part 2 of our Fundamental Analysis guide! Now, what can we learn from this event as traders? Markets are a self-fulfilling prophecy driven by human fear and greed. Yesterday, even just speculation that the relief fund would sell caused many to panic, and that panic was reflected on the chart.
The dog coin bull run has been brought to an abrupt halt when Vitalik Buterin (creator of Ethereum) dumped over $1 Billion of Shiba Inu (SHIB), Dogelon Mars (ELON) and Akita Inu (AKITA) to donate it to the India COVID Relief Fund. Which of these coins had the highest drop in value from this event?
DeFi Masterclass: Boost your Income
In this episode, we pick out the highest value insights into the DeFi space from previous guests.
According to CoinTelegraph Markets and TradingView, SHIB fell by 40%, AKITA by 50% and ELON crashed by a whopping 90%.
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