In trading, the term “volume” represents the number of units traded for stocks or futures contracts during a specific time period. Traders rely on it as a key metric as it allows them to gauge the liquidity level of assets and how to enter or exit a position close to the current price, which can be variable.
Buying Volume
When trading volume is higher, you will have greater ease in buying and selling large or small amounts of stock because other traders in the market are waiting to execute the other side of your trade.
For every trade, there must be a buyer and a seller. For example, a seller must sell to you to buy a stock, and for you to sell, a buyer must purchase.
This leads to some confusion as you may hear phrases like: “sellers are in control,” “buying volume outweighs selling volume,” “it’s a day with high buying volume.”
Buyers have control when the price is pushed up. Buying volume occurs at the ask price. This represents the lowest advertised price that sellers are willing to accept to unload their shares. When someone buys shares at the current ask price, it means that someone wants the shares and is included in the buying volume metric.
Selling Volume
Sellers have more control when the price is pushed down. Selling volume occurs at the bid price. This represents the highest advertised price that buyers are willing to pay. If someone wishes to sell at the ask price, it means that the seller doesn’t want the shares (and this represents an example of selling volume).
Volume typically shows up at the bottom of a stock price chart. The charts visualize trading volume in vertical bars, where the bar represents the number of shares traded over a specified time period.
The image below is an example of trading over a one-minute interval, where each bar shows the volume of shares traded in each one-minute period. The volume bars in the daily chart indicate the number of shares traded throughout the day.
FreeStockCharts.com
Relative Volume
Traders prefer to trade stocks with size on the day as it allows you to quickly enter and exit a position, with large or small positions.
The average volume statistic shows the number of shares traded in investments on a typical day. Some days may have significantly higher volume than usual, while on other days, you may see lower volume.
Day traders tend to gravitate towards stocks or exchange-traded funds (ETFs) with higher average volume and/or stocks or ETFs that have seen higher than usual volume on a given day. Below-average volume indicates lower interest in the stock on that day and possibly smaller price movements.
Higher Volume
Pay attention to days when volume is higher than usual. These days typically have significant volatility and price movements either up or down. If most of the volume occurs at the ask price, the price will drop, showing more that sellers are eager to unload shares.
If most of the volume occurred at the bid price, then the stock price will rise (due to demand and price availability). It shows more that buyers believe the stock is moving and are eager to purchase the stock.
Typically, more volume indicates that something significant has happened with the stock. It is often a news release or active traders who have suddenly become concerned or excited about the stock’s potential, affecting the trading volume.
Analyzing Stock Price Movement
Although not necessary, monitoring stock trading volume can help in analyzing stock price movement. You may find the following guidelines and recipes helpful for understanding and analyzing volume.
It shows
The increasing volume convinces buyers and sellers to push the price up or down, respectively. For example, if a stock’s trend is upward and the volume increases with the price, it shows that buyers have a willingness to buy; this usually happens with large upward movements (positive returns).
The trend can continue on decreasing volume for long periods, but generally, a decline in volume while the price continues indicates weakness in the trend. For instance, if the trend is upward but volume is consistently declining, it means that there are fewer people willing to buy and continue pushing the price upward. However, the trend will not change until the selling volume exceeds the buying volume overall.
Exposures
In fact, volume should be higher when the price moves in the direction of the trend, and lower when it moves against the trend, which is called “exposure.” This pattern shows strong movement in the direction of the trend and weak exposure, making the trend more likely to continue.
High volume combined with sharp price movements against the trend indicates weakness in the trend and/or the possibility of a reversal.
A sudden peak in volume occurs when trading volume increases significantly (five to ten times or more than the average volume) for that time period, and it can indicate the end of the trend. This is called “exhaustion moves”: when the number of shares being traded changes such that there is no one left to continue pushing the price in the direction of the trend, it often reverses quickly.
The Final Word
Volume can provide useful information when day trading. If used for something else, volume analysis is valuable for isolating stocks you consider trading daily. Ideally, your day trading stocks should have higher average volume so you can enter and exit easily.
This helps in managing risk as you can limit losses where you want with minimal price slippage. It also makes taking profits easier since many other traders will want to take your position (buying from you when you sell) when you are satisfied with your gains.
Volume can also be used to analyze stock trends, helping to evaluate the likelihood of the trend continuing. Volume analysis is not perfect and only provides additional information, so there is no need to feel pressured to start analyzing volume for successful day trading.
Trading decisions should primarily be based on price movements, as price movements dictate profits and losses. Shape your stock day trading strategy based on price movements, then add volume analysis to see if it improves your performance.
Frequently Asked Questions (FAQs)
Which stock exchange has the highest average volume?
The New York Stock Exchange has the highest average volume, followed by the NASDAQ.
How does volume affect stock prices?
Higher volume does not necessarily mean the stock will move more or less in any particular direction. However, higher volume can help ensure that the stock price moves more smoothly and gradually. For instance, if a stock trades only twice an hour, a trader might see the stock jump suddenly from $9 to $10 in one trade. The same stock might move on higher volume in the same time frame from $9 to $10, but it would do so across multiple trades. Traders watching the price will see it move a few cents at a time, rather than $1 at once.
What is a good volume for stocks?
If volume is important to your trading strategy, you should use stocks that trade millions of times a day, if not tens of millions of times.
Source:
https://www.thebalancemoney.com/day-trading-based-on-buying-volume-and-selling-volume-1031209
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