Stock volume not only gives you an insight into the overall activity of a stock, but it can also serve as an effective indicator. In fact, it’s one of the oldest indicators in stock trading. The volume analysis technique is very useful in assessing the trends of different stocks in the market. While there are many other indicators, not all of them are applicable to every trading platform. Stock volume, on the other hand, is an indicator that’s available on every platform.

Successful traders often take note of the number of shares traded over a specific amount of time to make sound trading decisions. Below is a comprehensive guide that provides a clear understanding of stock volume and how you can use it to get better trading results.

Key Takeaways

  • What is volume in the stock market?
  • What Is the difference between trading volume and dollar volume?
  • What is a relative volume?
  • Understanding stock volume movement
  • The importance of stock volume
  • How to use stock volume to improve your trading

What Is Volume in the Stock Market?

The stock volume definition is very simple, it refers to the number of recorded trades for a specific asset within a certain timeframe. As a trader, you can set the range of volume for the stock you want to track. For instance, it can be a one minute or a daily chart.

Regardless of the trading platform you’re using, stock volumes are clearly displayed throughout the day. If an asset has a heavy volume, it indicates that a lot of investors are interested in it. On the other hand, if it has a light volume, it’s generating less interest. By looking at share volume, you can know the real-time momentum of a stock, which enables you to make better informed decisions.

What Is the Difference Between Trading Volume and Dollar Volume?

When you’re trying to understand what volume means in stocks, it’s essential to know that stock volume is different from dollar volume. Stock volume is the total number of shares that change hands within a certain amount of time, while dollar volume is the total value of shares traded within the same timeframe.

You can calculate the dollar volume by multiplying the number of shares traded by the price per share. For example, if a certain stock traded a volume of 200,000 shares over 24 hours, and the price of each share is $4, the total dollar volume for the stock is $800,000.

The dollar volume is used to determine the liquidity of an asset. It’s also an important piece of information for understanding the flow of money into and out of a particular stock. It’s especially useful for analyzing a stock breakout or breakdown.

What Is a Relative Volume?

Besides knowing the stock volume meaning, you also have to understand what relative volume means. Basically, relative volume is a signal indicator that traders use to compare current and past trading activities within a certain timeframe. By carefully studying the relative volume, you can easily identify increased trading activity that leads to a significant movement in the price of a stock.

While looking at the relative volume of a stock, it’s important to take note of the days with volumes that are higher than usual. A high relative volume signifies higher stock volatility. You have to identify where the majority of the volume took place. If most of the trading occurs at the bid price, it’s likely that the selling volume will increase and price movement will be low. Conversely, if it happens at the offer price, you can expect to see an increase in buying volume and price, which indicates increased interest in the stock.

Understanding Stock Volume Movement

Although stock volume indicators are displayed throughout the day, an inexperienced trader may fail to understand them and end up making the wrong trading decisions. It’s essential to know that the price of a security will increase when it’s experiencing a high trading volume. Traders need increasing numbers to motivate them to keep trading a specific stock.

However, if a stock shows a large increase in price, but its volume is going down, it means that people aren’t interested in it. As a keen investor, you should take this as a warning. Price movement on low volume doesn’t serve as a strong enough signal. However, a slight movement on high stock volume indicates that there’s a fundamental change in the stock market.

There are days when you may see an abnormal increase in stock volume, which can be as much as five to 10 times the usual volume. When this happens, it can mean that a trend is about to end. This kind of volume movement is referred to as an exhaustion move. It usually occurs when there are a lot of shares changing hands, but few traders are pushing for an increase in the price of the stock.

Importance of Stock Volume

If you understand share volume, you can use it to assess the strengths and weaknesses of the market. One of the most important types of information you can obtain from volume analysis is price movements. A certain trend in price movement can be an indication of whether a stock is gaining or losing momentum. This can go a long way in helping you make informed trading decisions.

However, stock volume assessment shouldn’t be used as the sole entry or exit tool. There are other methods that you can use alongside volume analysis to make buying or selling decisions. Then again, you should know that volume is one of the fundamental pieces of information that many other indicators are based on.

Stock volume analysis is based on the belief that an increase in volume means that more traders are interested in a stock, whereas a decrease in volume indicates a lack of interest. While this may be true to some extent, not all share volumes are significant enough to be a reliable signal. In order to make great trades, you have to take into account the price action when there’s a significant movement in trading volume.

How to Use Stock Volume to Improve Your Trading?

What does volume mean in the stock market? Understandin this enables you to identify trends in the stock market that may lead to profit opportunities. The following are several volume-based signals that can help you achieve better trading results.

Convergence and Divergence

Traders are always on the lookout for convergence and divergence. If you’re able to identify these signals, you’ll be in a better position to confirm or deny a possible trend.

  • Convergence: Convergence refers to a situation where both the price and volume of a stock go in the same direction. It suggests that the stock market is showing normal behavior, meaning there isn’t an urgent need for action.
  • Divergence: Divergence indicates that the price and volume are moving in the opposite direction. It usually means something is changing and you should consider taking actions such as holding, tightening the stop, taking a partial profit, or selling a covered call.

Bullish and Bearish Signals

Looking at stock volumes is one of the ways to determine whether the stock market is bullish or bearish. If you know how to recognize a bull or bear market, you can take the appropriate measures to increase your profits or mitigate your losses.

  • Bullish signal: A bullish signal is an upward trend or upside breakout of the stock volume that occurs alongside a volume convergence. In an upside breakout, the prices of stocks often run into a resistance level. The signal becomes stronger when prices break through the resistance level at a time when stock volume is high. If an uptrend is accompanied by an increase in the stock volume, it means that more traders are interested in the stock, which may lead to more purchases at higher prices.
  • Bearish signal: A bearish signal means there’s a downside breakout or downtrend that happens simultaneously with either a volume divergence or volume convergence. During a downside breakout, the stock prices often get into a support level. If the prices break through the support level when volume is high, the changes are more significant. If stock volume increases during a downward trend, it means that more investors are showing interest in the stock, resulting in more sales at lower prices. As a stock’s price falls, you can make a profit by buying it as soon as you see a price pickup.

Having a proper understanding of the volume of stock definition enables you to gain an insight into the activities of investors in the stock market. The end result of volume analysis is the knowledge of the sentiments of traders. By implementing stock volume analysis, you can discover more profit opportunities in the stock market and take the right actions to maximize your profits. If you want to know more about stock volume and other aspects of trading, join our free, 7-day RagingBull.com Bootcamp to learn profitable tips and tricks from our millionaire trading experts.

Author: 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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