How to read the divergence between trading volume and price? How to confirm the buying point of volume and price?

Divergence in crypto trading occurs when price and volume move oppositely, signaling potential trend reversals; use technical indicators to confirm these patterns.

Jun 07, 2025 at 08:56 pm

Understanding Divergence Between Trading Volume and Price

In the world of cryptocurrency trading, understanding the relationship between trading volume and price is crucial for making informed decisions. Divergence occurs when the price of a cryptocurrency moves in one direction while the trading volume moves in the opposite direction. This phenomenon can signal potential trend reversals or continuations, making it a valuable tool for traders.

To read divergence effectively, it's important to analyze both the price chart and the volume chart side by side. When the price of a cryptocurrency is rising, but the volume is decreasing, this is known as bearish divergence. Conversely, if the price is falling while the volume is increasing, this is referred to as bullish divergence. These patterns can indicate that the current trend may be losing momentum or that a reversal is imminent.

Types of Divergence

There are two primary types of divergence that traders need to be aware of: regular divergence and hidden divergence. Regular divergence is the most commonly discussed and occurs when the price makes a higher high or lower low, but the volume does not follow suit. For instance, if the price reaches a new high while the volume reaches a lower high, this indicates a regular bearish divergence, suggesting that the upward trend may be weakening.

On the other hand, hidden divergence is less common but equally important. It occurs when the price makes a lower high or higher low, but the volume contradicts this by making a higher high or lower low. For example, if the price makes a higher low while the volume makes a lower low, this is a hidden bullish divergence, indicating that the downtrend may be losing steam and a reversal could be on the horizon.

Confirming Buying Points with Volume and Price

Confirming a buying point involves looking for specific patterns and signals that suggest a high probability of a price increase. One of the key indicators is volume surge, which occurs when there is a significant increase in trading volume alongside a price movement. A volume surge can confirm the strength of a price move, especially if it happens during a breakout or a reversal.

To confirm a buying point, traders should look for the following:

• Volume confirmation: A breakout or reversal should be accompanied by a noticeable increase in volume. This indicates that more traders are participating in the move, adding credibility to the price change.
• Price confirmation: The price should break through a significant resistance level or form a bullish reversal pattern, such as a hammer or engulfing candle.
• Trend confirmation: The overall trend should support the buying decision. For instance, if the long-term trend is bullish, a buying point confirmed by volume and price is more likely to succeed.

Using Technical Indicators to Enhance Analysis

While analyzing volume and price divergence is essential, incorporating technical indicators can enhance the accuracy of your analysis. Moving averages, Relative Strength Index (RSI), and MACD (Moving Average Convergence Divergence) are popular tools that can help confirm divergence signals.

For example, if you identify a bearish divergence where the price is making higher highs but the volume is making lower highs, you can use the RSI to confirm this signal. If the RSI is also showing a bearish divergence by making lower highs while the price makes higher highs, this strengthens the case for a potential trend reversal.

Practical Steps to Identify and Act on Divergence

Identifying and acting on divergence requires a systematic approach. Here are the steps to follow:

• Monitor price and volume charts: Regularly review both the price and volume charts of the cryptocurrency you are interested in. Use a reliable trading platform that provides clear and accurate data.
• Identify divergence patterns: Look for instances where the price and volume are moving in opposite directions. Pay attention to regular and hidden divergence patterns.
• Confirm with technical indicators: Use technical indicators like RSI, MACD, and moving averages to confirm the divergence signals you have identified.
• Set entry and exit points: Once you have confirmed a divergence signal, set clear entry and exit points. For instance, if you identify a bullish divergence, you might enter a long position when the price breaks above a key resistance level with increased volume.
• Manage risk: Always use stop-loss orders to manage risk. Determine your risk tolerance and set stop-loss levels accordingly to protect your capital.

Case Studies of Divergence in Cryptocurrency Trading

To illustrate how divergence can be used in real-world trading scenarios, let's look at a couple of case studies.

Case Study 1: Bitcoin Bullish Divergence

In early 2023, Bitcoin experienced a period of price decline, reaching a low of $30,000. However, as the price continued to make lower lows, the trading volume started to make higher lows, indicating a hidden bullish divergence. This divergence was confirmed by the RSI, which also showed a hidden bullish divergence. Traders who identified this pattern and entered long positions when the price broke above the $32,000 resistance level with increased volume were able to capitalize on the subsequent price increase to $40,000.

Case Study 2: Ethereum Bearish Divergence

In mid-2022, Ethereum saw a significant price increase, reaching a high of $3,500. However, as the price continued to make higher highs, the trading volume started to make lower highs, indicating a regular bearish divergence. This divergence was confirmed by the MACD, which showed a bearish crossover. Traders who identified this pattern and entered short positions when the price broke below the $3,200 support level with increased volume were able to profit from the subsequent price decline to $2,500.

Frequently Asked Questions

Q1: How can I differentiate between regular and hidden divergence?

Regular divergence occurs when the price makes a higher high or lower low, but the volume does not follow suit. Hidden divergence occurs when the price makes a lower high or higher low, but the volume contradicts this by making a higher high or lower low. Regular divergence typically signals a potential trend reversal, while hidden divergence suggests a trend continuation.

Q2: Can divergence be used as the sole basis for trading decisions?

While divergence is a powerful tool, it should not be used in isolation. It is best combined with other technical indicators and analysis techniques to increase the accuracy of your trading decisions. Always consider the overall market context and use risk management strategies to protect your capital.

Q3: How often should I check for divergence signals?

It is advisable to check for divergence signals on a regular basis, depending on your trading timeframe. For day traders, checking hourly or even every few minutes may be necessary, while swing traders might check daily or weekly charts. The key is to be consistent and thorough in your analysis.

Q4: Are there any specific cryptocurrencies where divergence signals are more reliable?

Divergence signals can be applied to any cryptocurrency, but they tend to be more reliable in cryptocurrencies with higher liquidity and trading volume, such as Bitcoin and Ethereum. These assets have more active markets, which can lead to more accurate and timely divergence signals.