Indicators, and what the readings mean

Volume and OBV: what trading activity confirms, and what it cannot

Volume is the one thing on the chart that is not computed from price. That makes it valuable and it makes it badly misread, because in crypto a volume figure is a fact about one exchange rather than about a market.

About 11 minutes to read. Free, no account.

What volume is, and the two units it arrives in

Volume is how much changed hands during the bar. It can be quoted in base units - how many coins - or in quote units - how much money. They are different numbers telling different stories, and charts do not always say which one they are drawing.

The same bar, two units

base volume    1,200,000 coins
average price  0.0024
quote volume   1,200,000 times 0.0024  =  2,880

Now let the coin triple to 0.0072 and trade a third as many units. Exactly the same amount of money moves:

After the price tripled

base volume    400,000 coins
average price  0.0072
quote volume   400,000 times 0.0072  =  2,880

base volume fell by two thirds; the money traded did not change

A base-unit volume chart across a large price move therefore shows a collapse in participation that did not happen. When volume looks like it fell, check whether the units are coins and the price moved.

The honest comparison for volume is against the same market’s own recent bars. A bar of 2,880 against a 20-bar average of 960 is three times normal activity, and that is a real observation about this market.

Why a crypto volume figure is not comparable across venues

In regulated equity markets a trade must be reported to a consolidated tape, so "the volume in this stock today" is a single well-defined number. Crypto has no consolidated tape. Every exchange publishes its own, and the one on your chart is whichever venue your chart is drawn from.

Venue. The same coin in the same hour has as many different volume figures as there are places it trades. Adding them up is not straightforward either, because the same coin moving between two venues can be counted twice.
Spot or derivative. A perpetual futures contract on a coin and the coin itself are separate markets with separate volume. Perp volume routinely exceeds spot volume, and the two can disagree about which bars were busy.
Quote currency. The same coin paired against a stablecoin, against bitcoin and against a local currency are three order books with three volumes.
Reporting incentives. Volume figures are self-reported by venues, and venues compete on how large theirs look. Treat a number from an exchange you know nothing about the way you would treat any other unaudited self-description.

What volume confirms, and the sentence that is never true

The claim you will read everywhere is that heavy volume on an up bar is buying pressure. Hold the definition of a trade still for a moment: every unit traded had a buyer and a seller. The volume on an up bar is simultaneously, and in exactly equal measure, buying volume and selling volume. There is no arithmetic that splits it.

What can be split is aggression: for each trade, the side that crossed the spread to make it happen rather than waiting in the book. That is a real measurement, it requires trade-by-trade data a candle chart does not contain, and the bar on your chart has already thrown it away. So:

Volume confirms participation. A lot or a little changed hands. That is a fact and it is worth having.
Volume does not confirm direction. The direction on the bar came from price. Volume cannot vote on it.
Volume does not tell you who. One large participant and ten thousand small ones can print the same figure.
Volume does not tell you why. A listing, an index rebalance, a liquidation cascade and genuine demand all look like a tall bar.

The defensible reading is narrow and real: a move that happened on much more activity than this market’s recent average involved more participants than usual. Whether those participants were right is a different question, and the bar does not contain it.

OBV: the construction

On-balance volume is a running total. If the bar closed above the previous close, add the whole bar’s volume; if it closed below, subtract the whole bar’s volume; if it closed equal, leave the total alone.

OBV, four bars by hand

start           previous close 100.00     OBV 0

bar 1   close 101.00  (up)      volume   500    OBV  0 + 500   =   500
bar 2   close 100.40  (down)    volume   900    OBV  500 - 900 =  -400
bar 3   close 101.20  (up)      volume   400    OBV  -400 + 400 =    0
bar 4   close 101.20  (equal)   volume 1,000    OBV  unchanged  =    0

price finished 1.20 higher than it started;  OBV finished at zero

Two things to notice immediately. Bar 4 traded twice the volume of any other bar and contributed nothing, because its close happened to match. And the absolute level of OBV means nothing - it depends entirely on where you started the sum. Only its changes can carry information.

OBV’s weakness, in one calculation

The sign of the close decides where the whole bar’s volume goes, and the size of the close is discarded entirely. A close one cent lower and a close five percent lower are the same instruction.

Two bars that break it

bar A   close  +4.00 points   volume    300    OBV   +300
bar B   close  -0.01 points   volume  3,000    OBV  -3,000

price over the two bars   +3.99 points
OBV over the two bars     -2,700

Price is up nearly four points and OBV says heavy distribution. Neither reading is a mistake - they are measuring different things, and OBV’s thing is "which side of the previous close did we finish on, times everything that traded". That is a coarser question than it looks when drawn as a smooth line.

Which brings us to the reading OBV is famous for. OBV divergence - price making a higher high while OBV does not - is subject to every problem the MACD lesson sets out about divergence, plus two of its own: the pivots are being read off a running total whose level is arbitrary, and the volume feeding it belongs to one exchange. Change venue and the divergence can disappear.

Reading volume next to a signal

There is one use of volume that is hard to argue with and has nothing to do with direction: can this market absorb the size you intend to trade? A coin whose busiest bar of the day is a few thousand dollars of quote volume is a market where your own order is part of the chart. That is a liquidity question, and volume is the right place to ask it.

What volume must not become is a reason to override a plan. "The volume looks supportive" is not evidence about a stop price that was decided before the trade existed, and a tall green bar is the most emotionally convincing thing on a chart. See the risk disclaimer.

The terms, defined

Volume: How much changed hands during the bar, in coins (base) or in money (quote). Not computed from price, which is what makes it worth having.
Base and quote volume: The same activity counted in coins or in money. Base volume falls when price rises at constant money traded.
Consolidated tape: A single reporting stream every trade in a security must appear on. Equity markets have one; crypto does not, which is why volume is per-venue.
Aggressor side: For one trade, the side that crossed the spread rather than resting in the order book. The nearest thing to "buying pressure", and it needs trade data a candle does not keep.
OBV: On-balance volume. A running total that adds the whole bar’s volume on an up close and subtracts it on a down close. Its level is arbitrary; only changes can mean anything.
Relative volume: A bar’s volume against the same series’ recent average. The only form in which a volume figure is comparable to anything.

What this means in practice

Check the units before reading a volume chart. Base-unit volume falls across a price rise with no change in money traded.
Compare volume only within one series on one venue. There is no consolidated crypto volume to compare against.
Stop saying buying volume. Every unit traded had a buyer and a seller in equal measure; only aggressor side splits them, and a candle does not carry it.
Read volume as participation, and take the direction from price.
Treat OBV’s level as meaningless and its construction as all-or-nothing - the size of a close is thrown away, only its sign is kept.
Use volume for the question it answers best: whether the market is liquid enough for the size you intend to trade.

Nothing in this lesson is financial advice or an instruction to trade. See the risk disclaimer. We never recommend a leverage setting - that decision is yours.