Is a Stock's Trade Volume Important?

Why do you need volume in trading. Member Sign In

The Bottom Line Trading volume is a measure of how much of a given financial asset has traded in a period of time. For stocks, volume is measured in the number of shares traded and, for futures and options, it is based on how many contracts have changed hands.

The numbers, and other indicators that use volume data, are often provided with online charts.

Does high trading volume indicate a good or bad stock?

Looking at volume patterns over time can help get a sense of the strength or conviction behind advances and declines in specific stocks and entire markets. The same is true for options traders, as trading volume is an indicator of an option's current interest. In fact, volume plays an important role in technical analysis and features prominently among some key technical indicators. Key Takeaways Volume measures the number of shares traded in a stock or contracts traded in futures or options.

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Volume can be an indicator of market strength, as rising markets on increasing volume are typically viewed as strong and healthy. When prices fall on increasing volume, the trend is gathering strength to the downside.

When prices reach new highs or no lows on decreasing volume, watch out; a reversal might be taking shape.

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On Balance Volume and Klinger Indicator are examples of charting tools that are based on volume. As traders, we are more inclined to join strong moves and take no part in moves that show weakness—or we may even watch for an entry in the opposite direction of a weak move. These guidelines do not hold true in all situations, but they offer general guidance for trading decisions.

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Trend Confirmation A rising market should see rising volume. Buyers require increasing numbers and increasing enthusiasm in order 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.

What is the Ideal Minimum Volume for Swing Trading Stocks & ETFs?

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.

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Exhaustion Moves and Volume In a rising or falling market, we can see exhaustion moves. These are generally sharp moves in price combined with a sharp increase in volume, which signals the potential end of a trend.

How to Use Volume to Improve Your Trading

Participants who waited and are afraid of missing more of the move pile in at market topsexhausting the number of buyers. At a market bottomfalling prices eventually force out large numbers of traders, resulting in volatility and increased volume.

We will see a decrease in volume after the spike in these situations, but how volume continues to play out over the next days, weeks, and months can be analyzed using the other volume guidelines. Bullish Signs Volume can be useful in identifying bullish signs.

He has provided education to individual traders and investors for over 20 years. Article Reviewed on July 21, Gordon Scott Updated July 21, In trading, the term volume represents the number of units that change hands for stocks or futures contracts over a specific time period. Traders rely on it as a key metric because it lets them know the liquidity level of an asset, and how easily they can get into or out of a position close to the current price, which can be a moving target.

For example, imagine volume increases on a price decline and then the price moves higher, followed by a move back lower. If the price on the move back lower doesn't fall below the previous low, and volume is diminished on the second decline, then this is usually interpreted as a bullish sign.

Volume and Price Reversals After a long price move higher or lower, if the price begins to range with little price movement and heavy volume, this might indicate that a reversal is underway, and prices will change direction. Volume and Breakouts vs. False Breakouts On the initial breakout from a range or other chart pattern, a rise in volume indicates strength in the move. Little change in volume or declining volume on a breakout indicates a lack of interest and a higher probability for a false breakout.

Volume History Volume should be looked at relative to recent history.

Comparing today to volume 50 years ago might provide irrelevant data. The more recent the data sets, the more relevant they are likely to be. Volume is often viewed as an indicator of liquidity, as stocks or markets with the most volume are the most liquid and considered the best for short-term trading; there are many buyers and sellers ready to trade at various prices. Three Volume Indicators Volume indicators are mathematical formulas that why do you need volume in trading visually represented in most commonly used charting platforms.

Each indicator uses a slightly different formula, and traders should find the indicator that works best for their particular market approach. Indicators are not required, but they can aid in the trading decision process. Volume is added starting with an arbitrary number when the market finishes higher, or volume is subtracted when the market finishes lower. This provides a running total and shows which stocks are being accumulated.

Is a Stock's Trade Volume Important?

It can also show divergencessuch as when a price rises but volume is increasing at a slower rate or even beginning to fall. Chaikin Money Flow Rising prices should be accompanied by rising volume, so Chaikin Money Flow focuses on expanding volume when prices finish in the upper or lower portion of their daily range and then provides a value for the corresponding strength. When closing prices are in the upper portion of the day's range, and volume is expanding, the values will be high.

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When closing prices are in the lower portion of the range, values will be negative. Chaikin money flow can be used as a short-term indicator because it oscillates, but it is more commonly used for seeing divergence. Klinger Oscillator 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.

Should You Pay Attention to a Stock’s Trading Volume?

The Bottom Line Volume is a handy tool to study trends, and as you can see, there are why do you need volume in trading ways to use it. Basic guidelines can be used to assess market strength or weakness, as well as to check if volume is confirming a price move or signaling that a reversal might be at hand.

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Indicators based on volume are sometimes used to help in the decision process. In short, while volume is not a precise tool, entry and exit signals can sometimes be identified by looking at price actionvolume, and a volume indicator.

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Higher volume stocks are those where there's more investor interest in buying and selling them, which sometimes results from a news event.