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Your Guide to Volume of Trade

Some traders blithely buy and sell securities without taking any fundamentals or technical indicators into account. Occasionally you can strike it big on gut feeling and rumor, but if you want to get serious about your trading strategy, you should research, research, research. Volume of trade is a great metric for traders to review. It can help you make smart, data-driven trading decisions you can feel confident about. Understand how volume of trade works and how to use it to up your investing game.

Takeaways:

  • Volume of trade is a technical indicator.
  • It tells investors the frequency of trading for a single security.
  • Volume of trade is used to calculate other metrics.
  • It’s usually found on the bottom of stock charts.

What Is Volume of Trade?

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Volume of trade is a technical indicator that tells investors the total number of shares or contracts traded in a set period of time for a single security or overall market. This metric can be calculated for any security that trades daily on an exchange, including:

Trading volume can shift sporadically, but it tends to follow regular increases and declines. For example, trading volumes are often highest at the start and close of business, and less so during the day. Mondays and Fridays are also high-volume days. Conversely, trading historically drops off around the winter holidays and every day at lunchtime.

How Volume of Trade Works

Volume of trade measures trading activity. The more active trading on a security, the higher the trade volume. The less active trading on a security, the lower the trade volume. Each individual exchange tracks and publishes volume data for their securities and overall market. Many exchanges publish this data every hour, with additional end-of-day summaries. However, any day-of numbers are just estimations. If you want actual figures, you’ll have to wait until the following business day to get them.

Some traders use tick volume as a proxy for trade volume. Tick volume represents the number of changes in price for a security throughout the trading day. Usually, the higher the tick volume, the higher the trading volume and vice versa.

Volume of trade, and specifically buying volume and selling volume, can help you determine when to make trades.

Buy Volume

High trading volume means lots of investors are interested in trading a security. Every transaction must have someone wishing to sell shares and someone hoping to purchase shares. High prices indicate a buyer’s market or buy volume. Sellers must oblige by the offer price, and part with their shares for the lowest price offered on that security. Otherwise, buyers will go where the security is cheaper.

Sell Volume

When the price of the security gets pushed down, which is usually correlated with low trade volume, we enter sell volume. Rather than securities trading for the lowest possible price, sellers are in control of the bid price. Since there are fewer interested buyers, the buyers usually have to agree to whatever price the seller wants to set.

Trade Volume Calculation and Example

Calculating trade is a straightforward task. You simply add together every trade made on a single security or market over a set period of time. For example, say Trader A purchases 100 shares of ABC stock, Trader B sells 200 shares of DEF, and Trader C buys 400 shares of GHI. To find the market trade volume, add 100 + 200 + 400 to find 700. The trade volume for this market is 700.

What Volume of Trade Tells You

Trading volume helps investors understand a security’s, or the overall market’s, liquidity and activity. Liquidity is tied directly to volume. The more people are interested in trading the security, the easier it will be to do so. Low trade volume, by contrast, usually means low liquidity. With few people on the exchange hoping to trade their shares, making sales or purchases can be a challenge.

Volume of trade also provides information about the market’s activity and direction, specifically in terms of trends up, or momentum, and trends down, or price reversals.

Momentum

Often, a security’s pricing moves in conjunction with its volume. So, if trading volume is high, the price is probably on the way up. If trading volume is low, the price is probably dropping. Traders can use this information to identify market trends and make decisions about buying, selling, or waiting to move on their investments.

Price Reversal

When there’s no connection between the trading volume and the price, either positive or negative, then a reversal in price might be imminent. The lack of coordination between trading volume and pricing shows the security’s weakness, meaning it’s unlikely it’ll continue on its current trajectory.

How to Use Volume of Trade

Volume of trade can help you make important investing decisions. It’s one element in a toolkit of indicators, metrics, and fundamentals you should use when analyzing a potential investment. Trading volume is a great standard for determining the strength of a security’s position and its likelihood to continue on its current trajectory. These guidelines help traders use volume of trade effectively when assessing a potential trade:

  • Confirm trends: Use the volume of trade paired with the price of the security to see if the security is truly trending up or down or if a reversal is coming.
  • Identify exhaustion moves: Exhaustion moves, like jumping onto a sudden peak, or hoarding over a sudden drop, cause volatility in the market. Be wary of making trades based on volume levels alone, since these are likely not trends.
  • Find bullish signs: Pair volume with stock charts to look for emerging patterns indicating good times to buy or sell. Find bullish signs in volume levels and then wait for the patterns to fully establish themselves.
  • Determine reversals: Volume and price moving in opposite directions usually means a reversal is coming. Keep an eye on the volume to see if it remains out of sync with the price to confirm the trend reversal.
  • Mark breakouts: An initial breakout from a pattern could mean an upward trajectory. Check the trade volume — if it’s also moving up, then the trend is likely. If the volume is low, it might be a false breakout.
  • Compare history: Look at the historical trading data over the last few days or weeks rather than months or years. You want to get a full picture of forming trends and patterns, but looking too far back can just confuse you.

Volume of Trade Indicators

Y ou can use indicators to help you dig into a potential trade and see if it makes mathematical sense. These three indicators use volume as one of the metrics. Not every indicator will make sense to use on every trade, so you should try them out and see which best applies to your investing strategy, trading style, and long-term investing goals.

On-Balance Volume

This technical metric identifies trading momentum using trade volume. To find the on-balance volume, or OBV, start with an arbitrary figure, like 100. If the market closes higher than it opened, add the volume. If the market closes lower than it started, subtract the volume. Do this for several days or a week to see how stocks are accumulated.

Chaikin Money Flow

This oscillator measures the accumulation-distribution line of moving average convergence and divergence — essentially, it gives a value to a security’s strength based on the volume. To calculate, take the 10-day exponential moving average of the accumulation-distribution line and subtract it from the three-day exponential moving average of the accumulation-distribution line. You’ll be left with the momentum that oscillates around the accumulation-distribution line.

Klinger Oscillator

The Klinger Oscillator is great for both long-term money flow trends and short-term market fluctuations. The calculation involves combining the buying and selling volumes over a period of time and comparing them to other time periods. Showing the fluctuations above and below the zero line can help traders make wise investment choices.

Where to Find Volume of Trade

T he easiest place to see trade volume is on a stock chart, which is an easy-to-read graph that tracks a security’s price over time. Many stock charts include volume data at the bottom of the chart in addition to price info. Usually, the trade volume is indicated by vertical bars that track the security’s price changes. Sometimes, the bars are shaded a specific color to help traders quickly see whether the volume increased or decreased. Green bars usually mean there was a jump in volume, while red indicates a drop.

Understanding the volume of stocks, bonds, and other securities can seriously help you make intelligent, data-based investing decisions. Since it’s easy to find stock volume data, you should consider reviewing it along with other technical indicators and security fundamentals before making any trades. It’s also an important value in many other metrics and calculations.