A study of the correlation between price and volume

There have been long debates on casualty, “which came first? Chicken or the egg?”

In the trading world, yes, there is the same dilemma: ‘the price or the volume?’. As those two are main factors for the traditional markets and applying exactly same to digital assets trading and risk management perspectives (which even need more study and research), we chose to check its relationship, including the open interest.

Trend or directional analysis have suggested tick-patterns based analysis, seeking signals for buy and sell. It has implication, although hard to capture, reproduce and apply past results, to current market with a certain level of confidence on execution with a given signal, on which is fast-paced, even 24hr trading in the world of digital assets. In addition, empirical researches and articles in the regulated market show less or no relationship between price and volume. However, we tried, putting ourselves in a humble and skeptical position, with a belief that there might be untouched holy grail.

For your information, we examined differential, moving average, and any different way of measures for further research and transparent results. However, we stick to a simpler one which still shows an interesting phenomenon in the end. This will be easy to replicate for readers or OKEx users for their trading appetite, latency horizon, and customized factors.

Highlights

  1. It is proved again that price and volume have no necessary relationship in general.
    However, BTC bi-weekly volume shows a weak negative correlation to all prices, which draws attention for further investigation.
  2. Bi-weekly futures are the least traded derivative across all OKEx crypto derivatives, and less connected to other maturities, based on volume.
    However, although it is less traded, it has a role in market turbulence.
  3. As known, open interest (OI) can be an indicator of price.
    5-min-based correlations show pretty strong correlation between prices and open interest.
    – This implies trading ideas for selected markets. More examinations need to carry out.
    – As the size of a market is smaller, the futures OI has a closer relationship with its price.

I. BTC Derivatives Market

Note

  • p.xxx refers to price of xxx, and v.xxx for volume.
  • FUT.OI is aggregated open interest in all futures market with a given time interval

As known from many previous researches on the regulated market, volume has almost zero relationship with price. However, there is one which catches our eyes.

  • Volume of BTC biweekly has a weak negative relationship, and yes even weak compared to other volumes vs prices, it raised questions and drives to further check.
    – As shown above, biweekly is the least traded products, compared to other derivatives. Volume drives on biweekly comes from the overall derivatives market trend. However, it might be also combined with the hedging needs in the market at the time of fluctuation, which means moving over to nearest maturity, waiting for the trends ends or reverse.
  • Although the price of BTC derivatives would keep a strong relationship on its term structure (spot-perpetual swap-weekly-biweekly-quarterly per basis), the volume of BTC biweekly shows less correlated, which tinker for any liquidity arbitrage along with basis trading strategy, if it breaks.
  • Open interest of BTC futures shows a negative relationship with prices. We will check whether this would continue for other markets.

II. ETH, BCH, LTC & EOS Derivatives Market

We categorized next four symbols, and findings are stated below.

  • Clearly shown again, there is no volume relationship to prices.
  • Overall open interest on each futures market has positive relationship to prices, which can be used as an indicator for trading and risk management.
    – Also allow you time to recap on why BTC’s OI mechanism is different with these four.
  • Relationship of Biweekly volume to others shows similar finding from BTC derivatives market.
    – Varying, but around 0.6 which is a strong correlation as number-wise, although compared to others, weaker.

III. ETC, XRP, TRX & BSV Derivatives Market

  • ETC, XRP has a stronger correlation with respect to OI vs prices.
    – which means OIs on these markets have higher confidence of trading signal, not a ‘fake’ intend to trade.
  • Interested to see Volume on ETC swap and quarterly have (weak) positive relationship to prices.
  • TRX, BSV open interest has a weak positive and even negative correlation with prices.
  • Among all the above four markets which have smaller market sizes compared to the previous section, the biweekly volume has a lower relation to other maturities’ volume.

IV. Remarks

We could see the biweekly’s volume data has indication over OKEx perpetual swap, futures markets. This may stem from hedging purpose at a market crash, waiting for the trends end or reversal at nearby safe heaven, although hard to resist fundamental change.

Since the open interest being used in this report is aggregated data, we admit precision is less sharp. Thus, we admit its limit and would like to go deeper on this analysis by segregating buy/sell trading volume, and same for open interest on order book level in the near future.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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