You’ve seen all the wild action in the stock market, it’s been going on for a while now… but how do you make sense of it?

Regardless of headlines… being that stocks move based on supply and demand, it all boils down to buyers and sellers duking it out.

But how do you know which side you should be on?

One simple answer, in my opinion… volume is providing the map, you need to understand how to read it.

I am going to walk you through how to read the map, so you can put yourself in a position to be on the right side of the trade…

The Significance of Volume

Analyzing volume can help you determine the strength or weakness of a price move.

When a stock is moving up or down in price, the strength of the move can be determined by the volume for that period. This is because traders put more significance on stock moves with higher volume attached…

But why do traders place more significance on moves with volume?

High volume suggests a heightened interest in a stock. So when a stock chooses a direction on high volume, it is often viewed as a signal of strong momentum in that direction.

As you can see in the chart below… The increased volume in the stock (blue rectangle) is coupled with a price move up, in this case a gap up. The volume is confirming the significance of the move and trader confidence in the direction of price.

And with that, the stock made an extended move up (blue arrow)…

Causes of Volume Spikes

The volume of a stock is usually higher around news or other big events.

This is due to the new information being released.

Investors then have to factor this new information into their trading plans creating more transactions than usual as they adjust their portfolios.

Examples of high volume events:

  • Earnings reports
  • Product announcements
  • Mergers and acquisitions
  • News relevant to a company’s operations
  • News that affects competitors or a whole industry

Traders can use this spike in volume to take advantage of the volatility, so it can be a good idea to keep an eye out for these types of events.

Using volume to in trading

Stock volume is loaded with valuable insights into the movement of stocks. Unlocking this value, however, takes practice.

Being able to put volume into perspective is key… and for that, we have the stock’s average volume. This provides you with a reference point when deciding when a spike in volume is significant.

First, you want to compare the volume to recent time frames as the volume from years ago may not relate to the volume today. So your average daily volume will generally be a rolling average over a recent period… such as 20 or 30 days.

Using the average daily volume, you can get a better idea of the significance of real-time volume as you look to take trades.

If a stock has an average daily volume of 9.3 million and suddenly trades 61.2 million shares, that’s significant… time to open your eyes.

Visually you can see this by overlaying the average volume line in the volume window of your chart.

In the chart below, the blue bars in the bottom window represent the daily volume, and the orange line shows the average over 20 trading days.

So when the blue bars get above the orange line, the volume is above average.

I circled an instance where volume was way above the line, therefore showing a significant increase in volume for that day.

Comparing current volume to the average volume is the simplest way to find trading interest in a stock.

Here’s how I use it in my trading:

I’m simply paying attention to stocks that are moving on high volume, relative to what’s normal for them.

You can overlay the average volume line, like above…or just look at the bars compared to each other…

You can see this level of volume just by looking at the chart because it will stick out.

Take a look at BORR…

The blue triangles show what I would call significant spikes in volume.

And once paired with a few basic chart patterns, I’m able to find great entries and exits.

If you’ll notice…the entry and exits are just a day apart.

This is a key part of my end of day momentum trades. Grabbing quick gains on increased volume and momentum of the stock.

Now take a look at MCOA…

This is an example of a consolidation breakout trade.

After consolidating for a month, MCOA broke above the range on a big surge in volume.

That’s key to the trade because it gives me the conviction behind the move.

And as you can see the stock rocketed up over 600% in just two days.

Both of these trade setups show why I don’t just want to get in on the volume spike…I also want to get out on the volume…

Once the volume dries up, the trade is over and we look for the next setup… whether in the same chart later or a new symbol.

There is no shortage of these setups…so why stick around when I’m up double digits that fast.

I use volume as a key indicator in all of my bread butter trade setups…and you should too.

Final Thoughts

Stock Volume is a simple and easy concept to grasp. At the same time it packs a lot of great information if you are able to understand it.

Letting volume bars sit on your charts while paying little to no attention to them is a rookie mistake. Successful traders place a great deal of value on volume and actively use it. You should too.

One of the simplest and most valuable trading tools out there is volume.

And you can learn my personal strategy for using volume with my chart setups with Profit Prism…

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Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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