Trading Insights: Why does trading volume matter?

Trading Insights: Why does trading volume matter?

Trading Insights: Why does trading volume matter?

Jen Albert

Jen Albert

Jen Albert

Jun 12, 2023

Jun 12, 2023

Jun 12, 2023

In the dynamic world of trading, numerous factors influence decision-making, but few are as crucial as volume. Trading volume serves as a key indicator of market liquidity and activity.

wBTC/ETH TradingView chart showing two Volume Indicators: Volume and Net Volume


High Trading Volume

Traders greatly benefit from high volume trade days. The increased liquidity in the market facilitates faster and more efficient order execution. The abundance of buyers and sellers actively participating creates a robust market environment where orders are more likely to be quickly filled. In addition to faster execution, high volume trade days also offer improved order fill rates. With a larger number of market participants, there is a higher probability of finding a counterparty willing to transact at the desired price level. This increased market depth allows traders to execute their orders closer to their intended price targets, reducing the potential slippage between the expected and executed prices. As a result, traders have a greater chance of achieving their desired trade outcomes and maximizing their profitability.


Low Trading Volume

However, when trading volume is low, it suggests limited market activity, which can have certain consequences for traders. With fewer market participants and reduced order flow, it becomes increasingly challenging to find counterparties to match buy and sell orders. This can lead to difficulties in filling orders at desired price levels and delays in order execution.


A helpful heuristic is to imagine a familiar marketplace — real estate, an auction house, whatever has a visceral intuition. Whatever the situation, consider that there are two sides to the market. There are those who are offering something at a price of their choosing (aka ‘makers’), and those who are considering the stuff for sale and their price, and deciding what to buy (aka ‘takers’). If either side dominates the other, the market can stagnate and result in low volumes. One person with a limited inventory can only sell so much; if the demand from buyers overwhelms the sellers, it is rational for sellers to adjust their prices. Generally, this means higher asking and lower bidding prices on behalf of the makers, who are complacent in finding someone willing to trade when demand is high. However, as makers become more ambitious with their prices, so too does demand taper off, sometimes abruptly, resulting in low volumes. Conversely, sellers can also overwhelm buyers; imagine an enormous shopping mall filled with merchants, and no customers. To compete with each other, makers will often relax their pricing, resulting in lower asks and higher bids, and therefore a narrow spread, to attract takers. However, with so little interest in buying, takers spoiled with choice have no urgency in their decisions and may trade at low volumes.


An Equilibrium in the Market

In both cases, the market returns to equilibrium. An abundance of demand from takers and exploitative pricing from makers both quenches the market appetite (i.e. reduces the demand) and attracts more competition from other makers prepared to offer more competitive prices (increases the supply). Whereas an abundance of supply from makers and a lazy and indifferent attitude from takers causes some merchants to exit the marketplace (i.e. reduces the supply) while competitive pricing attracts new interest (i.e. increases the demand). As the equilibrium is re-established, volumes tend to increase and both sides of the market are happier.


Carbon 🗿

Makers on Carbon will feel these market forces; offering competitive prices may not matter in the wake of market apathy, which translates to the likelihood of finding a trade. Fortunately, makers on Carbon have the flexibility to adjust their strategies in order to improve the chances of their orders being filled during periods of low trading volume.


One approach is to modify the strategy’s parameters to create a tighter range, concentrating market depth at specific price levels. This focused range makes the trades more attractive to takers, as there is a greater amount of the token available at a specific price point. By making this strategic adjustment, makers can reduce transaction costs for takers and increase the likelihood of faster trade execution. By visiting the Trade page of the Carbon App and mimicking a trade involving the two TKN within their strategy, the Carbon routing will show exactly where the prices (bids/asks) are. With this insight on their competition, makers may set their prices such that, when given a choice, a rational taker will take their orders first. Conversely, when spot volumes return, wider spreads and more ambitious price targets improve in their feasibility.


Conclusion

In conclusion, trading volume plays a pivotal role in the efficiency and profitability of market transactions. High trading volumes lead to greater market liquidity, facilitating swift order execution and improved fill rates, thus bolstering trader’s potential profitability. However, in periods of low trading volume, finding counterparties for transactions can be challenging, leading to delays and suboptimal fill rates. The market, in its inherent equilibrium-seeking nature, rebalances supply and demand, thus adjusting volumes. Makers, particularly on protocols like Carbon, can maneuver through such periods by strategically adjusting their pricing and order range, thereby enhancing the likelihood of their orders being filled and maintaining market fluidity. The marketplace’s dynamics underscore the need for adaptable strategies to successfully navigate varying trading volumes, reinforcing the intricate relationship between volume, price, and liquidity in trading.

In the dynamic world of trading, numerous factors influence decision-making, but few are as crucial as volume. Trading volume serves as a key indicator of market liquidity and activity.

wBTC/ETH TradingView chart showing two Volume Indicators: Volume and Net Volume


High Trading Volume

Traders greatly benefit from high volume trade days. The increased liquidity in the market facilitates faster and more efficient order execution. The abundance of buyers and sellers actively participating creates a robust market environment where orders are more likely to be quickly filled. In addition to faster execution, high volume trade days also offer improved order fill rates. With a larger number of market participants, there is a higher probability of finding a counterparty willing to transact at the desired price level. This increased market depth allows traders to execute their orders closer to their intended price targets, reducing the potential slippage between the expected and executed prices. As a result, traders have a greater chance of achieving their desired trade outcomes and maximizing their profitability.


Low Trading Volume

However, when trading volume is low, it suggests limited market activity, which can have certain consequences for traders. With fewer market participants and reduced order flow, it becomes increasingly challenging to find counterparties to match buy and sell orders. This can lead to difficulties in filling orders at desired price levels and delays in order execution.


A helpful heuristic is to imagine a familiar marketplace — real estate, an auction house, whatever has a visceral intuition. Whatever the situation, consider that there are two sides to the market. There are those who are offering something at a price of their choosing (aka ‘makers’), and those who are considering the stuff for sale and their price, and deciding what to buy (aka ‘takers’). If either side dominates the other, the market can stagnate and result in low volumes. One person with a limited inventory can only sell so much; if the demand from buyers overwhelms the sellers, it is rational for sellers to adjust their prices. Generally, this means higher asking and lower bidding prices on behalf of the makers, who are complacent in finding someone willing to trade when demand is high. However, as makers become more ambitious with their prices, so too does demand taper off, sometimes abruptly, resulting in low volumes. Conversely, sellers can also overwhelm buyers; imagine an enormous shopping mall filled with merchants, and no customers. To compete with each other, makers will often relax their pricing, resulting in lower asks and higher bids, and therefore a narrow spread, to attract takers. However, with so little interest in buying, takers spoiled with choice have no urgency in their decisions and may trade at low volumes.


An Equilibrium in the Market

In both cases, the market returns to equilibrium. An abundance of demand from takers and exploitative pricing from makers both quenches the market appetite (i.e. reduces the demand) and attracts more competition from other makers prepared to offer more competitive prices (increases the supply). Whereas an abundance of supply from makers and a lazy and indifferent attitude from takers causes some merchants to exit the marketplace (i.e. reduces the supply) while competitive pricing attracts new interest (i.e. increases the demand). As the equilibrium is re-established, volumes tend to increase and both sides of the market are happier.


Carbon 🗿

Makers on Carbon will feel these market forces; offering competitive prices may not matter in the wake of market apathy, which translates to the likelihood of finding a trade. Fortunately, makers on Carbon have the flexibility to adjust their strategies in order to improve the chances of their orders being filled during periods of low trading volume.


One approach is to modify the strategy’s parameters to create a tighter range, concentrating market depth at specific price levels. This focused range makes the trades more attractive to takers, as there is a greater amount of the token available at a specific price point. By making this strategic adjustment, makers can reduce transaction costs for takers and increase the likelihood of faster trade execution. By visiting the Trade page of the Carbon App and mimicking a trade involving the two TKN within their strategy, the Carbon routing will show exactly where the prices (bids/asks) are. With this insight on their competition, makers may set their prices such that, when given a choice, a rational taker will take their orders first. Conversely, when spot volumes return, wider spreads and more ambitious price targets improve in their feasibility.


Conclusion

In conclusion, trading volume plays a pivotal role in the efficiency and profitability of market transactions. High trading volumes lead to greater market liquidity, facilitating swift order execution and improved fill rates, thus bolstering trader’s potential profitability. However, in periods of low trading volume, finding counterparties for transactions can be challenging, leading to delays and suboptimal fill rates. The market, in its inherent equilibrium-seeking nature, rebalances supply and demand, thus adjusting volumes. Makers, particularly on protocols like Carbon, can maneuver through such periods by strategically adjusting their pricing and order range, thereby enhancing the likelihood of their orders being filled and maintaining market fluidity. The marketplace’s dynamics underscore the need for adaptable strategies to successfully navigate varying trading volumes, reinforcing the intricate relationship between volume, price, and liquidity in trading.

In the dynamic world of trading, numerous factors influence decision-making, but few are as crucial as volume. Trading volume serves as a key indicator of market liquidity and activity.

wBTC/ETH TradingView chart showing two Volume Indicators: Volume and Net Volume


High Trading Volume

Traders greatly benefit from high volume trade days. The increased liquidity in the market facilitates faster and more efficient order execution. The abundance of buyers and sellers actively participating creates a robust market environment where orders are more likely to be quickly filled. In addition to faster execution, high volume trade days also offer improved order fill rates. With a larger number of market participants, there is a higher probability of finding a counterparty willing to transact at the desired price level. This increased market depth allows traders to execute their orders closer to their intended price targets, reducing the potential slippage between the expected and executed prices. As a result, traders have a greater chance of achieving their desired trade outcomes and maximizing their profitability.


Low Trading Volume

However, when trading volume is low, it suggests limited market activity, which can have certain consequences for traders. With fewer market participants and reduced order flow, it becomes increasingly challenging to find counterparties to match buy and sell orders. This can lead to difficulties in filling orders at desired price levels and delays in order execution.


A helpful heuristic is to imagine a familiar marketplace — real estate, an auction house, whatever has a visceral intuition. Whatever the situation, consider that there are two sides to the market. There are those who are offering something at a price of their choosing (aka ‘makers’), and those who are considering the stuff for sale and their price, and deciding what to buy (aka ‘takers’). If either side dominates the other, the market can stagnate and result in low volumes. One person with a limited inventory can only sell so much; if the demand from buyers overwhelms the sellers, it is rational for sellers to adjust their prices. Generally, this means higher asking and lower bidding prices on behalf of the makers, who are complacent in finding someone willing to trade when demand is high. However, as makers become more ambitious with their prices, so too does demand taper off, sometimes abruptly, resulting in low volumes. Conversely, sellers can also overwhelm buyers; imagine an enormous shopping mall filled with merchants, and no customers. To compete with each other, makers will often relax their pricing, resulting in lower asks and higher bids, and therefore a narrow spread, to attract takers. However, with so little interest in buying, takers spoiled with choice have no urgency in their decisions and may trade at low volumes.


An Equilibrium in the Market

In both cases, the market returns to equilibrium. An abundance of demand from takers and exploitative pricing from makers both quenches the market appetite (i.e. reduces the demand) and attracts more competition from other makers prepared to offer more competitive prices (increases the supply). Whereas an abundance of supply from makers and a lazy and indifferent attitude from takers causes some merchants to exit the marketplace (i.e. reduces the supply) while competitive pricing attracts new interest (i.e. increases the demand). As the equilibrium is re-established, volumes tend to increase and both sides of the market are happier.


Carbon 🗿

Makers on Carbon will feel these market forces; offering competitive prices may not matter in the wake of market apathy, which translates to the likelihood of finding a trade. Fortunately, makers on Carbon have the flexibility to adjust their strategies in order to improve the chances of their orders being filled during periods of low trading volume.


One approach is to modify the strategy’s parameters to create a tighter range, concentrating market depth at specific price levels. This focused range makes the trades more attractive to takers, as there is a greater amount of the token available at a specific price point. By making this strategic adjustment, makers can reduce transaction costs for takers and increase the likelihood of faster trade execution. By visiting the Trade page of the Carbon App and mimicking a trade involving the two TKN within their strategy, the Carbon routing will show exactly where the prices (bids/asks) are. With this insight on their competition, makers may set their prices such that, when given a choice, a rational taker will take their orders first. Conversely, when spot volumes return, wider spreads and more ambitious price targets improve in their feasibility.


Conclusion

In conclusion, trading volume plays a pivotal role in the efficiency and profitability of market transactions. High trading volumes lead to greater market liquidity, facilitating swift order execution and improved fill rates, thus bolstering trader’s potential profitability. However, in periods of low trading volume, finding counterparties for transactions can be challenging, leading to delays and suboptimal fill rates. The market, in its inherent equilibrium-seeking nature, rebalances supply and demand, thus adjusting volumes. Makers, particularly on protocols like Carbon, can maneuver through such periods by strategically adjusting their pricing and order range, thereby enhancing the likelihood of their orders being filled and maintaining market fluidity. The marketplace’s dynamics underscore the need for adaptable strategies to successfully navigate varying trading volumes, reinforcing the intricate relationship between volume, price, and liquidity in trading.

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