Is the bottoming out when the trading volume shrinks to the ground? How to confirm the reversal signal?

"Low trading volume in crypto often signals market bottoms, but confirmation through price action, RSI, and volume surges is essential for reliable reversal identification."

Jun 19, 2025 at 03:07 pm

Understanding the Relationship Between Trading Volume and Market Bottoms

In the cryptocurrency market, trading volume is often viewed as a key indicator of market sentiment. When prices fall and volume shrinks to near-zero levels, many traders speculate that the asset may be reaching a bottom. This phenomenon typically reflects extreme disinterest or capitulation among investors. However, it's crucial to understand that low volume alone isn't sufficient to confirm a reversal. Instead, it should be used in conjunction with other technical tools and price action patterns.

One notable pattern associated with shrinking volume at market bottoms is called a "volume dry-up." This occurs when selling pressure diminishes significantly, suggesting that most holders have already exited their positions. At this stage, there are fewer sellers left to push the price lower, which can set the stage for a potential rebound.

Key Indicators That Help Confirm a Reversal Signal

While declining volume might hint at a possible bottom formation, confirming a reversal requires additional signals. Here are several key indicators and patterns to monitor:

• Price Action Patterns: Look for signs such as bullish engulfing candles, hammer formations, or morning star patterns that suggest buyers are stepping in.
• Moving Averages Crossovers: A golden cross, where the 50-day moving average crosses above the 200-day moving average, can indicate a shift from bearish to bullish momentum.
• Relative Strength Index (RSI): If RSI reaches oversold territory (below 30) and starts to rise while volume begins to increase, it could signal an imminent reversal.
• Volume Surges: After a prolonged period of low volume, a sudden spike in trading activity—especially on the upside—can act as confirmation that institutional or retail buyers are entering the market.

These signals, when aligned, offer stronger evidence that a reversal is underway rather than just a temporary bounce within a downtrend.

Analyzing Historical Examples in Cryptocurrency Markets

Historically, Bitcoin and other major cryptocurrencies have exhibited patterns where volume dried up before significant reversals. For instance, during the 2018–2019 bear market, Bitcoin saw multiple weeks of extremely low trading volume, especially around the December 2018 lows. However, it wasn’t until early 2019 when volume began to pick up alongside rising prices that a sustainable uptrend emerged.

Another example occurred in mid-2022 during the crypto crash, where Ethereum and altcoins experienced extreme volume contraction. The eventual reversal didn't occur immediately after the volume drop but followed a series of bullish candlesticks accompanied by increasing volume.

These historical cases emphasize the importance of waiting for confirmation signals rather than acting solely on volume contractions.

How to Use On-Balance Volume (OBV) to Spot Accumulation

On-Balance Volume (OBV) is a powerful tool that helps traders identify whether an asset is being accumulated or distributed. In a downtrend, if OBV starts to rise despite falling prices, it may indicate smart money accumulation.

To calculate OBV:

• Add the day’s volume to the previous OBV value if today’s closing price is higher than yesterday’s close.
• Subtract the day’s volume from the previous OBV if today’s close is lower.
• Keep OBV unchanged if the close remains the same.

When using OBV in a bottoming scenario:

• Watch for divergences between price and OBV. For example, if price makes a new low but OBV does not, this could signal underlying strength.
• Combine OBV with support levels and candlestick patterns for more accurate readings.

This technique allows traders to gauge whether the decline is still driven by selling pressure or if buying interest is beginning to build beneath the surface.

Practical Steps to Confirm a Reversal in Real Time

Confirming a reversal in real time requires discipline and a structured approach. Here’s how you can practically apply these concepts:

• Monitor Daily Volume Trends: Use platforms like TradingView or CoinMarketCap to track daily volume changes across exchanges. Look for consistent declines followed by a sudden surge.
• Overlay Key Technical Levels: Draw horizontal support zones and Fibonacci retracement levels. If price finds support at these levels along with rising volume, it strengthens the reversal case.
• Use Multiple Timeframes: Analyze both daily and weekly charts. A reversal on the daily chart supported by a weekly bullish pattern increases confidence.
• Check Order Book Depth: Observe the order book on major exchanges. An increase in buy walls forming at key support levels can indicate institutional interest.
• Track On-Chain Metrics: Tools like Glassnode or CryptoQuant provide insights into exchange inflows/outflows and whale movements. A reduction in sell pressure on-chain can precede a price reversal.

By integrating these steps into your analysis routine, you can better assess whether a bottom is forming or if the downtrend is likely to continue.

Frequently Asked Questions

Q: Can a cryptocurrency continue to fall even after volume drops significantly?

Yes, a sharp drop in volume doesn’t guarantee a reversal. In some cases, especially during macroeconomic downturns or regulatory crackdowns, prices can keep falling even with minimal volume due to sustained negative sentiment.

Q: Is it reliable to trade based only on volume patterns?

No single indicator is foolproof. Volume patterns should always be combined with price action, technical indicators, and on-chain data for more robust decision-making.

Q: What time frame should I focus on when analyzing volume for reversals?

It’s best to analyze both daily and weekly time frames. Shorter time frames like 4-hour or 1-hour charts can give early signals, but they are more prone to false signals compared to longer-term views.

Q: How long does a typical volume dry-up last before a reversal occurs?

There's no fixed duration. Some assets may bottom out within days of volume contraction, while others may take months. Patience and multi-indicator confirmation are essential.