3 Ways Traders Can Avoid Trading Signals With Complicated Volumes

Identifying fake exchanges and cryptocurrencies in Bitcoin (BTC) is important for traders so that they don't get surprised by a sudden sharp drop in low volume.

These make it almost impossible to execute stop losses and often lead to unexpected results. By analyzing how market makers are organized, order book mechanics, and a handful of practical indicators that can detect artificial volume, traders can identify potential red flags and avoid unintended consequences.

Market maker dynamics and order book mechanics

Market makers play a crucial role in crypto markets by placing multiple buy and sell orders. However, their actions are not always good. Those entities can manipulate the market by placing large orders at current prices to create a misleading appearance of demand or supply, known as rigging, or to engage in wash trading – buying and selling the same asset at the same time.

In addition, these entities often receive benefits such as discounted trading fees or non-public tokens, allowing them to manipulate market conditions to their advantage. But no matter how deceptive and subtle those elements are, there are three strong indicators that provide some warning signs that will allow experienced traders to spot anomalies and avoid falling prey to signals that quickly fade as soon as a good-sized sell order is placed. Market.

Designed size and order book depth and free market capitalization

When analyzing a crypto pair, compare the depth of the order book to the reported daily trading volume. If the depth of the order book is shallow but the transaction volume is high, it suggests that you may be using asymmetric communication. For example, if a crypto pair shows a depth of $50,000 at the 5% level but reports a daily volume of $2 million, it may indicate that the volume is artificially inflated rather than unsupported by real trading interest.

Note how Akash (AKT) volumes exceed 2% order book depth, even on exchanges that are supposedly safe from market manipulation. For comparison, the DYDX token with the same market capitalization offered $457,900 in auctions 2% below the market value on Binance, $209,000 on OKX and $64,700 on Crypto.com, about 3.5x higher than the AKT top-3 exchange average.

It is also important to evaluate trading volumes in relation to free market capitalization, which represents the total number of tokens available for trading. When daily volumes consistently exceed 30% of the token's free market cap, it means there is abnormal activity. This warning should be ignored during the first two trading days after a new listing, as it is typically encouraging and reflects genuine interest, especially when listed for the first time on a major exchange.

Gaps and imbalances in transaction volume

Watch for sudden and unexplained gaps in business volumes. These gaps, where a significant percentage of the cryptocurrency is lost and constantly visible, can be caused by such things as server downtime, market makers withdrawing liquidity, or exchanges on wash trades to create the illusion of activity. Such patterns are unnatural and typically indicate attempts to manipulate market perceptions.

The example above shows a clear gap in APENT (NFT) trading volume according to TokenInsigh data. The token listed by KuCoin, Bitget, Bybit and Gate.io typically offered a 24-hour trading volume between $1.7 million and $2.9 million in the 2-week period analyzed. However, during the 6-hour period on June 22, the average size of such rolls dropped to only $250,000, indicating the possibility of false positives.

Traders must use analytical tools to probe the depth of the order book to effectively identify false liquidity. Websites such as CoinMarketCap, CryptoCompare and Coingecko can provide comprehensive information on trading volumes and token availability, including details on locked tokens. Similarly, order book depth analysis is available at Okotoki, TensorCharts and TRDR, among others.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.