What is the average daily trading volume?

Definition:

Average Daily Trading Volume (ADTV) is the average amount of shares traded daily in a particular market.

Definition and Examples of Average Daily Trading Volume

Average Daily Trading Volume is the average amount of shares traded in a particular market over a specified time period. Common periods include a month, a quarter, or a year. Average Daily Trading Volume is often compared to the daily trading volume or another average calculated over a different time frame to see how much the volume has changed.

The use of average trading volume became popular as one of several data points for making investment decisions, in part, by William O’Neil in his book “How to Make Money in Stocks.” O’Neil highlighted two reasons to pay attention to ADTV: to ensure that the stock is liquid enough to enter and exit quickly, and to ensure that the current supply and demand from traders in the stock is working in your favor.

When the stock price is declining, you want the daily trading volume to be less than the average daily trading volume – indicating that selling pressure is decreasing. When the stock price is consolidating and not rising much, you want to see an increase in volume when the price starts to rise indicating that more buyers are entering the market. When the stock price is rising, you want increasing volume to indicate that the upward trend is continuing.

How Average Daily Trading Volume Works

To understand how daily trading volume works, it’s best to look at stock volume numbers from a site like Morningstar. Let’s take the volume numbers for Best Buy (BBY) on Morningstar as an example:

You can see on the right side of the page that Best Buy’s volume on this day was 1.6 million shares, with an average of 2.2 million. Morningstar calculates the average based on the previous twelve months – other sites may use different time periods. According to this page, Best Buy’s current volume is over 25% less than its average. Let’s take a look at the chart and see what’s happening.

We can see on the chart that at one point the stock price decreased from around $125 to $112 per share. We can also see on the volume chart below that the beginning of this decline was on a day with high volume. Now that volume has stabilized, you can wait until the price consolidates and volume starts to increase with buying pressure (if you believe the stock is good to buy).

Another thing to look for in average trading volume is whether the stock is liquid enough. The fewer the trades, the greater the risk – if there aren’t many shares being traded, one seller can push the price down.

Note:

The U.S. Securities and Exchange Commission uses ADTV to monitor share buybacks. Companies are not allowed to buy more than 25% of ADTV on any one day, except for one purchase per week. ADTV is calculated using stock volume figures from the last four weeks. This rule is put in place to prevent companies from buying all available shares for sale to drive up the stock price.

Traders who do not wish to hold stocks for long periods typically look for 100,000 to 500,000 shares traded daily on average, although this number is not fixed and can vary depending on your investment goals. In the chart above, Best Buy’s ADTV is about four times that volume. It should be noted that this general rule is aimed at traders and speculators who do not intend to hold stocks for long. If your goal is a five-year investment period, you only need to worry about average daily trading volume if it is close to the position you are trying to start with.

You can

Also find historical trading volume data on financial sites and use it to calculate the ADTV for any period you want. Just export the numbers to Excel and use the average formula.

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Sources:

Morningstar. “BestBuy Co Inc. (BBY).” Accessed Oct. 28, 2021.

Morningstar Office. “Average Daily Volume—Stocks, Closed-End Funds, and ETFs.” Accessed Oct. 28, 2021.

Securities and Exchange Commission. “Purchases of Certain Equity Securities by the Issuer and Others.” Accessed Oct. 28, 2021.

Cornell Law School Legal Information Institute. “17 CFR § 240.10b-18—Purchases of Certain Equity Securities by the Issuer and Others.” Accessed Oct. 28, 2021.

Warrior Trading. “Volume Definition: Day Trading Terminology.” Accessed Oct. 28, 2021.

Source: https://www.thebalancemoney.com/what-is-average-daily-trading-volume-5207510