Trading volume is the total number of shares of a security that were traded during a given period of time. Trading volume is a technical indicator because it represents the overall activity of a security or a market. Investors often use trading volume to confirm the existence or continuation of a trend, or a trend reversal. 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.
Key Takeaways
- Trading volume is the total number of shares of a security traded during a given period of time.
- Investors often use trading volume to confirm a trend's existence or continuation, or a trend reversal.
- Trading volume can provide investors with a signal to enter the market.
- Trading volume can also signal when an investor should take profits and sell a security due to low activity.
- Use volume in context with other indicators, rather than alone, to gain insight into trend direction and the timing of trades.
Trading Volume and Momentum
Trading volume can help an investor identify momentum in a security and confirm a trend. If trading volume increases, prices generally move in the same direction. That is, if a security is continuing higher in an uptrend, the volume of the security should also increase and vice versa.
For example, suppose company ABC's stock increased in price by 10% over the past month. An investor is interested in the company and wants to purchase 1,000 shares. They conduct a fundamental analysis of the company and see that its earnings and revenues have consistently increased over the past year. However, the investor is not confident the stock will continue in this uptrend and is worried that the trend may reverse.
In this example, trading volume analysis can be very useful. The investor sees that there was a steady increase in ABC's trading volume over the past month. They also notice that the trading volume was the highest that ABC stock had experienced over the past two years, and that the stock is continuing to trend higher. This signals to the investor that ABC is gaining momentum and gives them confidence that the trend should continue higher. Thus, the increase in trading volume led the investor to purchase 1,000 shares of ABC stock.
Trading Volume and Price Reversals
Trading volume can also signal when an investor should take profits and sell a security due to low activity. If there is no relationship between the trading volume and the price of a security, this signals weakness in the current trend and a possible reversal.
For example, suppose company ABC extended its uptrend for another five months and increased by 70% in six months. The investor sees that share prices of company ABC are still in an uptrend and continues to hold on to the shares. However, the trading volume is decreasing. This could signal to the investor that the bullish uptrend in ABC stock is beginning to lose momentum and may soon end.
The following week, the share price of ABC stock decreases by 10% in one trading session after being in an uptrend for six months. This results in the stock breaking its upward trend. More significantly, the trading volume spikes higher when compared to its average daily trading volume (ADTV). The investor sells out of all theshares of ABC the next day because the combination of a sharp drop in price and spike in trading volume confirmed that the uptrend might be coming to an end and a reversal might be in the offing.
Use Volume For More Trading Insight
Use Volume For More Trading Insight
- High or increasing volume in an uptrend can signal a buying opportunity.
- Decreasing volume in an uptrend may suggest that it's time to sell and take profits.
- High or increasing volume in a downtrend can signal that it's best to stay on the sidelines.
- Decreasing volume in a downtrend may indicate a coming reversal and a time to buy.
- More involved chart patterns, including the head and shoulders and the flag and pennant, use volume to confirm trends, reversals, and breakouts.
What Is a Good Trading Volume?
Good trading volume for a security is hard to define because trading volume's value comes into play when looked at in context with other indicators, such as price direction and volatility. Any level of volume that provides investors with specific insight into a security's price action (and a sense of the trading interest in that security) can be thought of as a good trading volume.
What Does High Trading Volume Mean?
High trading volume (relative to past measures of that volume) that accompanies rising prices or an upward trend can signal strong interest in a security by buyers. On the other hand, high trading volume that accompanies dropping prices or a downward trend can signal worry on the part of investors. This can result in more selling and even lower prices. High trading volume could also reflect some isolated news or event related to the company associated with the stock.
Is Low Volume Bullish or Bearish?
Trading volume is defined as the number of shares traded in a particular period of time. So, low trading volume can indicate a lack of interest in either buying or selling. That means it could be bullish if low volume occurs in a downtrend. It could be bearish if it's noted in an uptrend.
The Bottom Line
Trading volume is one of the metrics that traders watch to predict the momentum of a stock or other security. An increasing trading volume might be a sign of favorable sentiment, indicating a likely price increase. A falling trading volume might indicate that the market is losing interest. As with other technical indicators, it is important to look at a broad range of metrics before making an investment decision.
FAQs
When trading volume is high as markets rise, it often suggests strength. If a high-volume stock's price drops, it might mean a trend reversal is likely. Conversely, low-volume stocks hitting new highs might indicate a trend change.
What is the best indicator to show volume? ›
There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume.
What is considered a good trading volume? ›
Any level of volume that provides investors with specific insight into a security's price action (and a sense of the trading interest in that security) can be thought of as a good trading volume.
How can you tell if stock volume is buying or selling? ›
You can distinguish buying volume from selling volume based on whether a transaction occurs at the bid price or the ask price. Changes in volume can give traders short-term indications of where the price might go next.
Is low volume bullish or bearish? ›
A bearish signal appears when volume falls dramatically, and price moves sideways after a significant increase. If a large number of bullish or bearish candlesticks with a large body appear at this stage, whether the news is positive or negative, it'd be better to view it as a bearish signal.
How to tell if a stock is bullish or bearish? ›
It can be easy to confuse your financial market animals — both bulls and bears are large, strong and known for territorial behavior. But in a bull market, stock market values rise at least 20% from a recent low, whereas in a bear market, average stock values drop by at least 20% from a recent peak.
What is the most accurate indicator for trading? ›
Best trading indicators
- Stochastic oscillator.
- Moving average convergence divergence (MACD)
- Bollinger bands.
- Relative strength index (RSI)
- Fibonacci retracement.
- Ichimoku cloud.
- Standard deviation.
- Average directional index.
Best Volume Indicators in TradingView
- On Balance Volume(OBV) The on-balance volume(OBV) is a momentum indicator that uses volume flow to predict price movement. ...
- Money Flow Index(MFI) ...
- Volume-Weighted Moving Average(VWMA) ...
- Accumulation/Distribution (A/D) ...
- Price Volume Trend(PVT) Indicator.
Volume RSI (Relative Strength Index) works similarly to the RSI indicator except that buying and selling volumes are used in the formula instead of price changes. A volume RSI reading of above 50% indicates a bullish trend, and below 50% indicates a bearish trend.
What trading volume is too low? ›
Typically, any stock that trades at fewer than 10,000 shares a day is considered a low-volume stock.
The formula for calculating the average daily trading volume of a stock is very simple. You just take the total trading volume for each day over the span of time that you want to compute the average volume for and divide that total by the number of trading days in that time span.
How much money do day traders with $10,000 accounts make per day on average? ›
Assuming they make ten trades per day and taking into account the success/failure ratio, this hypothetical day trader can anticipate earning approximately $525 and only risking a loss of about $300 each day. This results in a sizeable net gain of $225 per day.
How to read the volume indicator? ›
Analyzing the volume indicator involves understanding the patterns created by the trading volume and their relationship with price action. High trading volumes often indicate increased market interest and liquidity, whereas low volumes suggest a lack of interest or limited market activity.
What is a good PE ratio? ›
To give you some sense of what the average for the market is, though, many value investors would refer to 20 to 25 as the average P/E ratio range. And again, like golf, the lower the P/E ratio a company has, the better an investment the metric is saying it is.
How to study volume in trading? ›
Basic Guidelines for Using Volume
- Trend Confirmation. A rising market should see rising volume. ...
- Exhaustion Moves and Volume. In a rising or falling market, we can see exhaustion moves. ...
- Bullish Signs. Volume can be useful in identifying bullish signs. ...
- Volume and Price Reversals. ...
- Volume and Breakouts vs. ...
- Volume History.
A rise in volume in coalition with an initial breakout from a range, or any other form of chart pattern, indicates a strength in the move. When there is little change in the volume or even decreasing volume on a breakout, it indicates a lack of interest and more potential for a false breakout to occur.
How do you read stock trade volume? ›
Volume, average volume and day's range
Volume represents the number of shares that have been traded so far that day, while average volume is the average daily volume for a specified period. Day's range shows the highest and lowest prices the stock has traded for up to the current moment of that trading day.
How do you interpret on balance volume? ›
Interpretation of On Balance Volume
When the OBV line is rising, it suggests that buying pressure is increasing, and the price may follow an upward trend. Conversely, a falling OBV line indicates that selling pressure is increasing, which could lead to a downward price trend.
What does it mean when a stock has high volume but no price movement? ›
Also look for churn, or heavy volume with little change in stock price. This type of action can signal a change in direction for stocks, either up or down. It tells you momentum is halting. On weekly charts, look for weeks with above-average or sharply higher volume than in the previous week.
