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Academy > Technical Analysis > What Is Net Volume Index: Indicator Of Real Market Sentiment >

What Is Net Volume Index: Indicator Of Real Market Sentiment

2022-08-24 06:07:53

Summary:

  • Net volume is a basic indicator that calculates the net inflow and outflows of an asset over a typically short period of time. Momentum indicators such as net volume provide insight into the market sentiment on an asset at the underlying level.
  • Positive net volume indicates that there’s greater interest in buying an asset than selling it, even if the price of that asset is currently on the downtrend.
  • Negative net volume indicates that there’s greater interest in selling an asset than buying it, even if the price is currently on the uptrend.

 

Net-Volume

 

Every trade that takes place on the market contributes to the total volume of the traded asset. For example, if Bitcoin (BTC) is bought 20 times and sold 15 times during a one-day period, then the volume for that day would be 35 BTC.

Volume is a key metric used by analysts to confirm the significance of market movements and the basis for a large number of technical indicators. If the price of an asset changes significantly during a period, then the corresponding volume can be used to determine whether that move will carry forward or correct in the near future.

What is Net Volume Index?

Also known as the net volume index, the net volume indicator is used to determine market sentiment by analyzing the volume of buys and sells over a certain period of time. When used for technical analysis, it’s typically plotted against a specific time period, with the net volume represented as vertical bars. Net volume is one of the more accessible indicators as volume is tracked across all trading platforms and the data reflected by the indicator is fairly basic.

How Does The Net Volume Index Work?

Traders can profit from going long when they identify a bullish trend or going short when they identify a bearish trend. A positive net volume is bullish as the overall sentiment of the market has trended towards buying the asset.

On the other hand, a negative net volume is bearish as the overall sentiment of the market has trended towards selling. Generally speaking, the net volume should match the direction of the trend. If the price and volume do not follow each other, this may indicate that the trend will change in the near future.

Net volume differs from more complex types of indicators in that it only considers the volume of the traded asset. The simplistic nature of net volume means that it’s typically used in conjunction with other forms of technical analysis to read trends. For example, traders can be more confident in the momentum of net volume trends if the resistance of the asset is broken (when bullish) or the support of the asset is breached (when bearish).

How To Calculate Net Volume?

The net volume is ultimately the sum of:

  • Uptick Volume: The volume of the asset traded while its price is in an upswing. Uptick volume is generated when the price breaks through its resistance and can serve as evidence that the asset is beginning a substantial move upwards.
  • Downtick Volume: The volume of the asset traded while its price is in a downswing. Downtick volume is generated when the price breaches its support and can serve as evidence that the asset is beginning a substantial move downwards.

Both the uptick and downtick indicators are used by technical analysts to determine when to buy or short assets. These types of indicators are commonly applied in momentum trading strategies. While fundamental trading strategies seek to identify undervalued assets for long-term investment, momentum trading works by taking advantage of volatility in the market to profit from short-term positions.

The net volume formula can be calculated by subtracting the uptick volume by the downtick volume over a specified period of time. For example, suppose that Solana (SOL) experiences 20 downward trades at 50 coins each (falling by 5%) and 4 upward trades at 1000 coins each (rising by 3%). Even though the price of SOL fell by 2%, the net volume is positive by 3000, indicating a bullish trend despite the drop in price as the coin was bought more than sold.

The same formula works in the opposite direction. For example, suppose that Filecoin (FIL) experiences 5 downward trades at 500 coins each (falling by 3%) and 20 upward trades at 50 coins each (rising by 5%). Even though the price of FIL rose by 2%, the net volume is negative by 1500, indicating a bearish trend despite the increase in price as the coin was sold more than bought.

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How Does Net Volume Compare To Other Indicators?

The net volume indicator is similar to the money flow index (MFI), which differs from net volume in that it uses both price and volume data to determine if an asset is overpriced or undervalued. Traders can calculate the MFI by dividing the positive money flow by the negative money flow. If the resulting ratio is below 20, the asset has likely been undervalued from overselling. On the other hand, if the ratio is above 80, the asset has likely been overvalued from overbuying.

The net volume indicator is also similar to the on-balance volume (OBV) indicator, which primarily differs in that it sums up volume flows across a range of days rather than looking at any single period. If there are more up days than down days, the OBV returns a positive projection.

How To Trade Using Net Volume?

Accurately detecting upswings and downswings in the market is the key to profiting with momentum trades. The net volume indicator filters out the absolute values, only returning the end net value. This ensures that you get an accurate picture of the underlying movement of an asset, regardless of its current trajectory.

As such, net volume is best used as a secondary component of a larger technical analysis strategy, and especially for short and finite periods of time.

Even when the net volume indicator reveals a strong trend, there is no guarantee that the price will move in the expected direction. This is especially true in the cryptocurrency market, which is much more volatile and unpredictable than traditional asset markets. Rather than used alone, the net volume indicator is best used to complement other forms of technical analysis indicators such as the relative strength index (RSI).

Remember that no matter how good you get at reading net volume indicators, there are times when the trade will just not work out. That being said, a sound and well-executed strategy based on the application of indicators with proper risk management will benefit your portfolio in the long run. If you’re not confident about applying indicators to real-world trades just yet, Phemex offers a fantastic paper trading platform that you can use to hone your skills.

Using The Net Volume Indicator

On Phemex, you can use the net volume indicator to help plan out your trades. Once you have selected the relevant trade pair, click on the Indicators button at the top of the chart and a new window will pop up. Input Net Volume in the search bar and you will find the indicator.

Click on the indicator to fill the chart with a trend line. In this example, we’re using the daily chart for the net volume indicator. If we switch to any other time on the chart, the indicator will adjust accordingly. Here is what the net volume indicator trend line (in dark blue beneath the price chart) looks like on the daily ETH/USDT chart:

 

net volume index
Example of net volume indicator with the ETH/USD trading pair on Phemex.

 

How To Use The Net Volume Indicator?

  • Choose a trading pair on Phemex, such as BTC/USDT, ETH/USDT, or SOL/USDT.
  • Choose the chart you want. If you’re trading for the long term, choose 1D or 1W charts.
  • Click on Indicators, find Net Volume, then click on it to activate it.
  • Draw a new trend line on the existing lines.
  • Plan your trading strategy according to the market trend.

The versatile Phemex trading platform allows you to combine the net volume indicator with a huge variety of other technical analysis tools. The Phemex Academy provides tutorials for a great deal of other indicators that can be used in conjunction with the net volume for more precise analysis.

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Conclusion

Learning how to identify and use momentum indicators gives traders a greater deal of certainty for short-term trades. It should be noted that momentum trades carry unique risks in that they’re based on an analysis of technical indicators rather than any underlying value of the coin.

As with all indicators, the net volume does not guarantee that the price will move in any given direction. Given the simplicity of net volume, it’s best used in conjunction with other indicators for more scientific projections. This simplicity can also be an advantage, as the net volume can be used to filter out the “noise” from more complex indicators, helping you focus on true volume.


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