Trading volume Definition and Meaning

what is trading volume

Essentially, trading volume can legitimize a security’s price action, which can then aid an investor in their decision to either buy or sell that security. Some investors use technical analysis, a strategy that uses changes in stock price to make decisions about buying or selling a stock. Technical analysts are primarily looking for entry and exit price points; volume levels are important because they provide clues to where the best entry and exit points might be.

He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Price breakouts accompanied by high volume are more likely to be genuine, confirming the strength of the breakout and saving traders from entering a position during fake breakouts. This way or the other, monitoring trading volume is crucial to understanding market dynamics and activity.

More significantly, the trading volume spikes higher when compared to its average daily trading volume (ADTV). As presented above, investors will have an easier time selling a stock when the price is rising with high volumes. When a stock is not traded very often, and there is limited buying interest, an investor may have a difficult time unloading their shares. High volumes can indicate bullish or bearish sentiments and the level of investor conviction regarding a particular stock.

  1. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.
  2. Still, some forex trading platforms, such as TradingView and MetaTrader 4 and 5, do display volume data.
  3. In fact, some traders prefer markets with low trading volume as these are less volatile and, therefore, less predictable.
  4. An investor is interested in the company and wants to purchase 1,000 shares.

Traders and investors use the metric to gauge the interest in a security to help them make trading decisions. When trading volume is up—whether it’s buying or selling volume—it means the security is gaining attention and trading activity is increasing. Each exchange tracks its trading volume(s) and provides data to traders and investors for free or a subscription fee. Trade volume numbers are reported as often as once an hour throughout the current trading day, but reported daily and hourly trade volumes are estimates.

What is trading volume?

Volume can also be used to determine when the market has gotten exhausted with the direction of a particular stock. When there’s a sharp change in the price and a sharp increase in volume, it suggests the trend could be ending. Investors who are afraid of missing out tend to buy high, resulting in a sharp increase in volume. However, when everyone has bought a stock, the security price often stagnates and then falls because the market has exhausted all buyers interested in the stock. The most common timeframe to use when talking about volume in stocks is the daily volume. The average daily volume is the average number of shares traded per day over a certain period, often approximately 1 month.

Volume trading is built on the premise that high or low trading volume can serve as an indication of the prevailing buying or selling pressure within the market. By scrutinizing volume data, traders aim to foresee potential price movements, gaining an edge in the tumultuous landscape of financial markets. Volume levels can also help traders decide on specified times for a transaction.

Buyers require increasing numbers and increasing enthusiasm to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, and this is a warning of a potential reversal. This can be hard to wrap your mind around, but the simple fact is that a price drop (or rise) on little volume is not a strong signal. A price drop (or rise) on large volume is a stronger signal that something in the stock has fundamentally changed.

What Is a Good Volume for a Stock?

Volume tends to be highest near the market open and close and the start of the week and last day of the week. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.

what is trading volume

Normally, when you identify a significant volume spike in the market, you’ll enter a position in the direction of the volume bias. For example, as seen in the image below, if the volume spikes suggest that the buying pressure increases, you enter a long buying position. For instance, assets like corn, wheat futures, and some penny stocks are less likely to experience sudden price swings, making them suitable for range-bound trading strategies. CMF gives traders a clear picture of the market sentiment and helps them make informed decisions based on the prevailing pressure. Additionally, as you can see in the Tesla 1H chart above, trading volume is consistently higher when the market opens.

Overall, the volume trading strategy offers a systematic approach that provides traders with a valuable toolkit to navigate the complexities of financial markets. Those who learn how to use volume in trading certainly have the ability to identify many trading opportunities. Unlike stock markets with centralized exchanges that provide accurate volume data, forex operates over-the-counter (OTC). As a result, determining precise overall trading volume is a bit more complex. In recent times, high-frequency traders and index funds have become a major contributor to trading volume statistics in U.S. markets.

Traders follow the average daily trading volume of a security over short-term and longer-term periods when making decisions on trade timing. Traders can also use several technical analysis indicators that incorporate volume. The Securities and Exchange Commission (SEC) regulates the sale of securities by traders. According to Rule 144, sellers cannot make security sales exceeding 1% of outstanding shares of the same class being sold. Trading volume is a measure of how much a given financial asset has traded in a period of time. For futures and options, volume is based on how many contracts have changed hands.

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As a trader, it’s essential to scrutinize the volume accompanying a breakout. A breakout that occurs with low volume may indicate a false breakout or a lack of market conviction. Conversely, a breakout accompanied by a substantial increase in trading volume is more likely to be authentic and profitable.

Example of volume of trade

Volume patterns provide an indication of the strength or conviction behind price advances or declines for a stock or sector or even the entire market. An advance on increasing volume is generally viewed as a bullish signal, while a decline on heavy volume can be interpreted as a bearish signal. New highs or lows on decreasing volume may signal an impending reversal in the prevailing price trend. Daily volume is the most common time frame used when discussing stock volume. Average daily trading volume is the daily volume of shares traded, averaged over a number of days; this smooths out days when trading volume is unusually low or high. Tick indicators display the total number of transactions over a specified time frame, appearing as bars on a graph beneath price charts.

Best Technical Indicators to Measure Volume

Fluctuation above and below the zero line can be used to aid other trading signals. The Klinger oscillator sums the accumulation (buying) and distribution (selling) volumes for a given time period. These are generally sharp moves in price combined with a sharp increase in volume, which signals the potential end of a trend. Participants who waited and are afraid of missing more of the move pile in at market tops, exhausting the number of buyers.

Technical analysts use trading volume data to assess the strength of a price movement and whether it’ll stay at its new level for very long. When the price of a stock goes up, technical analysts check if volume rose as well if it did, then these analysts consider the price movement more significant and more likely to stick. The following week, the share price of ABC stock decreases by 10% in one trading session after being in an uptrend for six months.

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