The Hustler's Digest StaffThe number of shares of a stock that have changed hands over a given period is known as volume. Investors are more interested in purchasing or selling stocks with more significant volumes. Learn more here.
The term “volume” in trading refers to the number of units that exchange hands for stocks or futures contracts over a given period. Traders consider it a critical statistic since it tells them how liquid an asset is and how easy it is to enter or exit a position close to the current price, which can be a shifting target.
What is average volume in stocks?
The total number of shares exchanged (bought and sold) during a trading day or a given period is volume. It is a measurement of total share turnover.
Each ticket symbolizes trade and contributes to the total volume of trading. The volume is counted on each transaction, even if the same shares are traded many times. If 500 XYZ shares were bought, sold, re-bought, and re-sold four times, the volume would be 2,000, even if the same 500 shares may have been in play numerous times.
Volume trading strategy
Here’s how to read stock volume, which can be a good indicator of market strength. When a stock rises, it suggests that it is in good shape. Investors can determine how convinced traders are about a specific stock or the market. High volumes imply an increased belief in the stock’s or market’s direction of movement. However, because volumes do not reveal the rationale for the market trend, investors will have to do their investigation to figure out why it is happening.
Investors can utilize volume data to help them decide whether or not a stock is a good fit for their portfolio. A rising stock, for example, should see increased volumes, indicating a strong bullish conviction. However, if investors notice a rise in price but a drop in volume, it suggests a lack of interest, implying that a reversal is imminent. It might not be a good idea to acquire that particular stock in such a situation. If recent stock price gains were on little volume, investors who are confident about the stock, in the long run, might want to wait for a drop before buying it.
Volume can also gauge whether the market has had enough of a particular stock’s direction. When there is a significant price change and a significant increase in volume, the trend may be coming to an end. Fearful investors tend to purchase high and sell low, resulting in a substantial rise in volume. However, when everyone has bought a stock, the price remains stable for a while before falling since the market has exhausted all potential purchasers.
When a stock has bottomed out, on the other hand, many investors have been forced out due to the declining price, resulting in enormous volumes and increased volatility. Following the rise, the volume drops. However, it may change again in the long run.
A significant positive indicator is when a stock price decreases, but volume rises ahead of a share price rebound, followed by another decline. It is usually a bullish indicator if the stock price does not fall below the prior low when it lowers a second time, and volume is down during that second downturn.
Buying volume
Because other traders are in the market, waiting to fulfill the opposite side of your trade, you’ll have an easier time purchasing and selling large or little volumes of stock when trading volume is higher.
A buyer and a seller are required in every transaction. A seller must sell to you to buy a stock, and a buyer must buy from you for you to sell.
This leads to some confusion because you’ll likely hear phrases like:
- “The sellers are in control.”
- “Buying volume is outstripping selling volume.”
- “It’s a heavy buy-volume day.”
When the price is pushed upward, buyers have control. The offer price is used to determine the buy volume. It’s the lowest stated price at which vendors are willing to sell their stock. When someone buys shares at the current offer price, it indicates that they are interested in the stock and is counted as part of the buying volume metric.
Selling volume
When the price is driven lower, sellers have more influence. At the bid price, sell volume occurs. The bid is the highest stated price that buyers are willing to pay. When someone wants to sell at the bid price, they don’t want the stock (this demonstrates an example of selling volume).
The bottom of a stock price chart usually reflects volume. Trading volume is shown in vertical bars on graphs, with each bar representing how many shares changed hands over a specific period.
What is trading volume?
Volume is a metric that measures the total number of shares bought and sold over a given period or a trading day. It will also entail the purchase and sale of each share over a set period.
Several investors use volume to assess trends and patterns in the stock market. Whether an investor discusses the entire stock market or individual stock shares, volume information may be accessed anywhere.
The volume also refers to the total number of shares traded during the trading day, whether they are bought or sold. As a result, volume is high when equities are actively traded in the stock market, and when stocks are not frequently traded, volume is low.
The trade volume of various financial instruments, such as derivatives, equities, bonds, and multiple commodities, can be calculated.
The stock exchange publishes the trading volumes for each trading session in the stock market—the total volume of all stocks and individual stocks traded on the stock exchange in volume.
During the trading session, investors can learn about the volume of equities traded on the Sensex or the Nifty 50. Many financial platforms utilize candlestick charts to display volume for a specific asset over a particular period. The green color represents buying volumes, whereas the red color represents selling quantities in this graph.
Various volume charts are time-dependent, such as hourly, daily, and monthly volume charts.
However, the trading volume on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) will be completely different.
Where to find trading volume?
All stock exchanges track the volume of all the equities in the market. As a result, it is freely available in the market, allowing investors to obtain information on the importance of a specific stock quickly.
There are various ways to get the trade volume, which may be easily found on news, websites, or third-party websites that post stock market statistics.
Investors can also check trade volume and obtain information from their particular brokers or investment platforms.
Trading volume versus dollar volume
All stock exchanges track the volume of all the equities in the market. As a result, it is freely available in the market, allowing investors to obtain information on the volume of a specific stock quickly.
There are various ways to get the trade volume, which may be easily found on news, websites, or third-party websites that post stock market statistics.
Investors can also check trade volume and obtain information from their particular brokers or investment platforms.
Relative volume
Traders prefer day trading stocks with high volume because it allows them to enter and exit positions quickly, regardless of how large or minor they are.
The average volume statistic displays how many shares are exchanged in investments regularly. On certain days, the volume will be substantially larger than usual, while it will be significantly lower on others.
Day traders favor stocks or exchange-traded funds (ETFs) with a high average volume and stocks or ETFs with a higher-than-usual volume on a particular day. Low volume on a given day suggests less interest in the stock and, as a result, smaller price swings.
Why does volume matter?
Any stock’s lifeblood is volume. It denotes an interest in the trading activity of the shares in question. A higher volume suggests a higher level of interest, whereas a lower volume indicates a lower level of interest.
In many circumstances, an increase in volume tends to set off significant price swings, but this is not always the case. Contrary to popular belief, considerable volume isn’t necessarily required for breakouts or breakdowns, especially in this age of algorithms that know what price levels will effectively cause substantial movement. Many traders have lost money shorting ‘light’ volume breakouts that continue to grind higher despite the absence of consistent significant volume.
Traders prefer day trading stocks with high volume because it allows them to enter and exit positions quickly, regardless of how large or minor they are.
The average volume statistic displays how many shares are exchanged in investments regularly. On certain days, the volume will be substantially larger than usual, while it will be significantly lower on others.
Day traders favor stocks or exchange-traded funds (ETFs) with a high average volume and stocks or ETFs with the higher-than-usual volume on a particular day. Low volume on a given day suggests less interest in the stock and, as a result, smaller price swings.
What does relative volume matter?
The relative volume calculates a multiple by comparing the present volume to the “normal” volume. The standard volume is the average volume for a specific number of days over a certain time. When the relative volume is 2.5, the shares are trading 2.5 times as much as usual. This indicates a rise in trading activity, leading to a substantial price change. On most trading/chart platforms, relative volume is offered. A spike in volume might signal money flowing into or out of stock, indicating movement.
How are volume and price related or unrelated?
The increase in trading volumes of a particular stock has a significant impact on the stock price. High volumes aren’t necessarily the driving force behind a stock’s rise and fall; various other factors play a role.
The volume can assist investors in validating the existence of a single trend on several occasions, and when observed combined, it can be a helpful signal.
When volume is trending higher and is combined with other markets, it indicates that the stock market is profitable and healthy.
For Example:
1) If the price of a particular stock falls along with the stock volume, there is a downward trend in the stock volume.
2) If the stock volume is going up and stock markets are up too, there is an upward trend in the stock volume.
Basic guidelines for using volume
There usually are rules utilized when examining volume to identify the strength or weakness of a move. As traders, we are more likely to participate in decisive actions and avoid weak activities, or we may even look for an entrance in the opposite direction of a weak move.
These guidelines do not hold in all situations, but they offer general guidance for trading decisions.
Trend confirmation
Volume should rise in a rising market. To keep driving prices upward, buyers must increase their numbers and excitement. Increasing price and declining volume could indicate a lack of interest, signaling a reversal. This is a difficult concept to grasp, but the plain fact is that a price reduction (or gain) on low volume is not a strong signal. A significant volume price drop (or climb) indicates that something in the stock has fundamentally altered.
Exhaustion moves and volume
We can notice exhaustion moves in a rising or declining market. These are usually dramatic price changes accompanied by a sharp increase in volume, signaling the end of a trend. Participants who have been waiting and are fearful of missing out on more of the move rush in at market tops, exhausting the supply of purchasers.
Falling prices eventually force away many traders at a market bottom, resulting in higher volatility and volume. In these cases, we will see a reduction in volume following the surge, but the other volume criteria can be used to examine how volume continues to play out over days, weeks, and months.
Bullish signs
When looking for bullish indications, volume can be helpful. Consider the following scenario: volume rises as a price falls, rises, and drops again. If the price does not fall below the previous low on the way back down, and the volume on the second decline is reduced, this is usually seen as a positive indication.
Volume and price reversals
Suppose the price begins to range after a protracted rise higher or lower, with little price movement and significant volume. In that case, this could indicate that a reversal is occurring, and prices will change direction.
Volume and breakouts vs. False breakouts
A surge in volume suggests strength in the move when it first breaks out of a range of another chart pattern. No change in volume or declining volume indicates a lack of interest and a higher likelihood of a false breakout on a breakthrough.
Volume history
The volume should be compared to recent history. Comparing volume today to volume 50 years ago may yield useless information. The more current the data sets are, the more helpful they will be.
Trading volume analysis – 4 simple trading strategies using chart patterns
Analyzing the health of a trend based on volume activity is known as volume analysis. In reality, volume is one of the market’s oldest day trading indicators. The volume indicator is also the most commonly utilized indicator by market technicians. Other indicators may be missing from trading platforms, but you’d be hard-pressed to find one that doesn’t have volume.
Strategy 1: Breakouts and volume
Breakout trades are undoubtedly the most well-known trading tactic in the world. Every retail and professional trader knows how to anticipate them from the start. The plan is straightforward.
Price and volume are the two most essential factors in confirming a breakout. Similarly, when equities break crucial levels with little or no volume, you should mistrust the breakout and prepare for a reversal of the highs/lows.
Strategy 2: Trending stocks and volume
You want to see volume climb on each subsequent high and fall on each retreat when a stock is trending higher in a stair-step strategy. The underlying message is that there is more positive volume when the stock moves up, indicating the trend’s health.
This type of volume confirmation frequently occurs when a stock is in an impulsive phase of a trend.
Strategy 3: Volume spikes
News-driven events are frequently the cause of volume surges. Regardless of the explanation, the price surge is worth investigating in terms of price action.
A spike is defined as a 500 percent increase in volume over the previous volume average. Because the movements are unsustainable owing to supply and demand imbalances, this volume increase frequently leads to rapid reversals. Trading against volume spikes can be beneficial, but it necessitates a high level of skill and knowledge of volume analysis.
These volume increases could also be an opportunity for you to take a counter-trend position as a trader. If you’re going to trade volume surges, you’ll need to know what you’re doing. The action moves quickly, and you must keep your stops tight, but if you time it correctly, you can make some good money.
Strategy 4: Trading the failed breakout
We’d be remiss if we didn’t mention failed breakout attempts. As a day trader, you’ll experience your fair share of trades that don’t pan out. It’s all a part of the fun.
So, how can you tell whether a trade is losing money? The warning indicators can be seen in the volume, a simple solution. The Chipotle Mexican Grill chart is shown above. As you can see, the stock attempted to break out in the first hour of trade.
Take note of how the volume on the breakout attempt began strong but gradually decreased. Don’t be shocked if the stock starts to drift sideways for no apparent reason with this signature. While this would have been a break-even deal, your money is essentially sitting idle. At the very least, you wouldn’t have lost money on this bet.
What does liquidity mean?
The amount of purchasing or selling that the market can absorb without causing a market impact is liquidity. How many shares can you buy or sell without the stock’s price moving? Liquidity takes precedence over price. This is particularly true for huge stock dealers and hedge fund managers. Large orders are detected by high-frequency trading programs and clever algorithms, which might potentially front-run the orders, prompting traders to pursue entrances and exits.
For example, if you possess 100,000 shares of a stock that is now trading at $8 and has an average daily volume of 1 million shares, selling the shares in a single session might cause the stock to fall to $7, resulting in an average selling price of $7.50. As a result, while the position is valued at $8 million, the actual value is $7.5 million.
There was a $500,000 market effect or slippage to liquidate the position. Although your selling may not be the primary cause of the stock’s decrease, keep in mind that algorithms will detect your need for liquidity and will continue to lower bids and thin out liquidity until your selling is complete. Selling leads to more selling. Professional funds and money managers delegate large transactions to market makers, who ‘handle’ the orders to minimize market impact slippage costs.
Frequently Asked Questions (FAQs)
Which stock exchange has the most volume on average?
The New York Stock Exchange has the highest average volume, followed by the Nasdaq.
How does the volume affect stock price?
More volume does not imply that a stock will move more or less in a particular direction. On the other hand, more volume can aid in ensuring that the stock price moves more smoothly and gradually. For example, if a stock only trades twice an hour, a trader might see the stock go from $9 to $10 in a single trade. In the same time frame, a stock with a larger volume might move from $9 to $10, but it would do it over several trades. Traders tracking the price would see that it was increasing by a few cents at a time rather than by a dollar all at once.
What is a good volume for stocks?
If the volume is essential for your trading strategy, you should use stocks that trade millions of times per day, if not tens of millions of times.
The bottom line
For many traders and investors, volume in the stock market is a valuable instrument. Several mutual fund investors prefer to invest in stocks with a high volume. On the other hand, Intra-day traders hunt for companies with high transaction volumes since they close their positions in a shorter time frame.
Apart from the volume, there are several essential elements to consider while investing in stocks. Several investors will be able to acquire long-term profit and build long-term wealth by making the correct option and keeping all of the essential criteria in mind.
