Disclaimer: This is for informational purposes and is not meant to serve as financial or investing advice.
What Is Stock Volume?
Stock volume is the total number of publicly listed company shares traded in the stock exchange at a given period of time, typically over one trading day. Trading volume is a technical indicator used to gauge market sentiment and investor activity.
As a rule of thumb, securities with more daily volume are considered more active and liquid despite market volatility. Securities with less daily volume are less active and liquid.
Every transaction between a buyer and seller of a security asset contributes to the total volume count of the number of shares. For example, if seven transactions occur in a day's time frame, the trade volume for the day is set at seven.
Usually, only estimated trade volume can be recorded as frequently as every hour. Final figures for trade volume are reported the next day and are available to the public on a brokerage's stock chart.
Why Does Stock Volume Matter to Investors?
Stock volume matters to investors because it is an essential indicator in technical analysis. After all, it measures the strength of a market move indicating strong stocks and trend reversals in stock trading.
1. Indicates Strong Stocks To Invest In
The higher the volume during a price move, the higher the significance of the move, and vice versa. The lower the volume of a price move, the less significant.
For investors, this matters because it indicates strong stocks to invest in. By technical analysis, a strategy based on stock prices, investors can determine the right time to buy a stock. Technical analysis looks for a stock's entry and exit price points; volume levels provide further clues about where these price points are located.
There is increasing volume when buyers and sellers become more active around a particular price movement. It also indicates which stocks can be held for short-term or long-term.
2. Displays Trend Reversals
Stock volume can also indicate when chart patterns will reverse and the volume of price movements lower.
Bar charts determine a particular stock's volume level and make volume trends easily identifiable. These charts can indicate higher volume or lower volume.
After analysis, if price moves begin to slow down, this can mean that a reversal is underway, and prices can change direction.
Reversals during trading can be rewarding because new trend shifts can lead to profitable trades. Note that vice versa can also happen where the change may not be in your favor, and you risk losing money.
How Do Traders Use Volume?
For traders, volume can confirm chart patterns and price trends. Ultimately this indicates how much interest the stock is receiving from prospective buyers.
Higher volume means higher interest around a stock, and lower volume means lower interest. All in all, higher volume indicates higher liquidity, which translates to more straightforward trade.
Traders rely on chart patterns, breakouts, reversal trades, and trends, all indicated by volume.
- Breakouts: When a breakout occurs, this indicates a shift in the supply and demand of a stock. If a breakout happens during low volume, the aggression between buyers and sellers is lower than in higher volume. High volume on a breakout implies increased trader interest around that move.
- Reversals: Trend reversals, as mentioned before, indicate sentiment shifting from a current trend to a new trend forming in the opposite direction. Reversals
- Trend tracking: Traders track trends daily. A volume indicator can display prices trending up or down. You will want the volume to favor the direction of a trend to confirm if it is a good move.
How Is Volume Used in Technical Analysis?
As mentioned above, volume analysis is a vital metric in technical analysis. Volume indicators are mathematical formulas that are represented in charting platforms. Traders use three different volume indicators.
On-Balance Volume (OBV)
This formula adds volume when the market finishes higher or subtracts volume when the stock market ends lower than its starting point. The final number provides the total number of accumulated stocks and divergences, for example, when prices rise but volume begins to fall.
Volume Price Trend Indicator (VPT)
The VPT formula indicates a security’s price trend direction and strength of price change. This trend presents a cumulative volume line that adds or subtracts a multiple of the percentage change in a share price’s trend and current volume, depending on its movement direction.
VPT determines the balance between a security’s supply and demand. The volume indicates the force behind the trend.
Volume Relative Strength Index (RSI)
The RSI is a momentum indicator used in technical analysis. It measures the speed and magnitude of a security’s recent price changes. RSI points to overbought and oversold securities and can indicate when to buy and sell, reversal trends, and a corrective pullback in price.
Bullish Signs To Look for in Stock Volume
Volume can help identify bullish signs. Bullish in the stock market means that there are projected positive developments or growth in the market.
If stock volume increases, so does the particular stock's ask price, leading to bullish signs.
Upside Breakout With Above-Average Volume
An upside breakout indicates above-average volumes, increasing trader support and commitment to a particular stock. This indicates bullish signs.
Uptrends in volume also mean higher liquidity, increased interest, and, usually, an increase in price due to this interest. You want to look for uptrends in both volume and price. If the two trends' correlation is opposite, it is usually not an ideal purchase.
What Are Some Bearish Signs To Look for in Stock Volume?
Opposite of bullish, bearish signs in the market indicate the belief that prices and buying volume of a particular stock will fall.
During downtrends, a stock price will run into a support level, where downtrends begin to weaken. When the price of a stock breaks below a support level, the breakout is more significant if the volume is heavy and above average. In this case, volume can undermine a price trend.
This is a bearish sign because as prices fall at heavy volumes, there is less attractiveness to a stock.
The Bottom Line
Stock volume is an essential tool used by beginners and experienced day traders to determine the best market moves, including identifying strong stocks, weak stocks, entry points, exit points, and trends.
While interpreting stock volume is essential, it is not the only trading strategy you should use when considering a trading decision.
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What Is Volume of a Stock, and Why Does It Matter to Investors? | Investopedia
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How to Use Stock Volume to Improve Your Trading | Investopedia
What Is the Volume Price Trend (VPT) Trading Indicator? | Investopedia
Relative Strength Index (RSI) Indicator Explained With Formula | Investopedia