Is the shrinking volume rise reliable? The key lies in this hidden indicator!

Shrinking trading volume during a crypto price rise often signals weak buying pressure, suggesting fewer traders are supporting the uptrend.

Jun 13, 2025 at 03:22 pm

Understanding the Shrinkage in Volume

When analyzing cryptocurrency price charts, shrinkage in trading volume is often overlooked. This phenomenon occurs when a price increase coincides with a decrease in volume compared to previous periods. Many traders question whether this pattern is reliable or if it’s just a random fluctuation. In essence, volume shrinkage during a price rise suggests weak buying pressure, indicating that fewer traders are participating in the upward movement.

This situation may point to either profit-taking by large holders or a lack of conviction among retail investors. It's crucial to distinguish between normal market fluctuations and potential signs of reversal. A shrinking volume during an uptrend can act as a warning sign, but its reliability depends heavily on other contextual factors like overall trend strength and key support/resistance levels.

The Hidden Indicator: On-Balance Volume (OBV)

To better interpret the significance of shrinking volume during a rally, one must turn to On-Balance Volume (OBV) — a powerful yet underutilized tool in crypto analysis. OBV accumulates volume on up days and subtracts it on down days, helping to visualize buying and selling pressure over time.

If price is rising but OBV is declining, it signals divergence. This hidden indicator reveals that despite higher prices, accumulation is weakening. In contrast, if OBV continues to climb alongside price, it confirms healthy demand. Monitoring OBV allows traders to spot early signs of exhaustion or continuation in a trend, especially useful in volatile markets like cryptocurrency.

How to Calculate and Interpret OBV

Calculating OBV is straightforward:

• Start with a base value (often set at zero).
• If today’s close is higher than yesterday’s, add today’s volume to the previous OBV.
• If today’s close is lower, subtract today’s volume from the previous OBV.
• If the close is unchanged, carry forward the previous OBV value.

Once plotted, look for divergences between OBV and price. For example, if Bitcoin rises to $70,000 but OBV fails to surpass its prior high, it indicates weakening momentum. Conversely, if price consolidates while OBV climbs, it hints at underlying strength.

Traders should overlay OBV on their price chart and draw trendlines to identify breakouts or breakdowns earlier than price action alone would suggest.

Combining OBV with Other Technical Tools

While OBV is valuable, it should not be used in isolation. Combining it with moving averages, RSI, and Fibonacci retracement levels enhances accuracy. For instance, pairing OBV with Relative Strength Index (RSI) helps filter false signals.

If RSI shows overbought conditions above 70 and OBV starts declining, it strengthens the case for a pullback. Similarly, during a downtrend, if OBV begins to rise while RSI dips below 30, it might signal early accumulation ahead of a reversal.

Additionally, applying trendline analysis on OBV itself can reveal critical support or resistance zones invisible on the price chart. These combined insights offer a more robust framework for decision-making, especially in fast-moving crypto markets.

Practical Examples in Crypto Markets

Take Ethereum’s price action in Q2 2024 as an example. During a sharp rally from $1,800 to $3,500, volume began to shrink significantly after the first week of the move. While many traders were bullish based on price alone, those who monitored OBV noticed a clear divergence — OBV failed to confirm new highs.

This was a red flag suggesting that the rally lacked strong institutional backing or broad market participation. Shortly afterward, Ethereum experienced a steep correction, validating the OBV signal. Traders who recognized this divergence had a strategic advantage in managing risk or exiting long positions.

Another example occurred during Solana’s surge in late 2023. Despite multiple all-time highs, OBV remained flat, signaling that each new high was being driven by less volume. This ultimately preceded a major selloff, reinforcing the importance of monitoring this hidden indicator.

Frequently Asked Questions

Q: Can I rely solely on OBV for trading decisions?

A: No single indicator should be used in isolation. While OBV provides insight into volume dynamics, it works best when combined with other tools like moving averages, RSI, and candlestick patterns.

Q: Is shrinking volume during a rally always bearish?

A: Not necessarily. Shrinking volume can sometimes occur during healthy consolidation phases. The key is to assess the broader context, including trend structure and key support/resistance levels.

Q: How do I access OBV on popular trading platforms?

A: Most major platforms like TradingView, Binance, and Bybit include OBV as a built-in indicator. Simply search for “OBV” in the indicator list and apply it to your chart.

Q: Does OBV work equally well across all cryptocurrencies?

A: OBV is more effective on larger-cap, actively traded assets like Bitcoin and Ethereum. In low-liquidity altcoins, volume data can be erratic, making OBV less reliable.