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Bring Relevance to Price Moves by Analyzing Stock Volume

Jason BondJason Bond ·

stock chart with buildings in background

A breaking news release comes out about a company and the stock price jumps fast and furious. The stock volume is higher than normal.

The trading floor is abuzz. The stock price makes wild moves in each direction as buyers and sellers battle it out.

The volume is providing a road map. You just need the tools to read it.

Stock volume is a measure of the number of shares that changed hands between buyers and sellers over a given period of time. The buyers need sellers to get the shares they want and the sellers need buyers to get rid of their shares.

When buyers and sellers agree on a price, a transaction occurs creating the current market price of the stock. Stock volume measures the total number of these transactions.

Volume can be measured for any period of time. Day traders may use volume for daily, 30 min, 20 min, or even shorter time frames. Whereas an investor may look at weekly and monthly volume.

The most commonly seen and talked about volume measure is the total daily volume. Which measures the total number of transactions over a day.

Volume is one of the more simple indicators out there. Yet it can provide you with a lot of useful information. Most traders have volume on their charts, yet many don’t even pay attention to it.

The successful traders pay attention.

Importance in Trading

Volume is one of the most important measures in technical analysis. Analyzing volume can help you determine the strength or weakness of a price move. While things aren’t always what they seem, stock volume provides insight into to a stock’s price movement.

When a stock is moving up or down in price, the strength of the move depends on the volume for that period. The higher the volume during that price move, the more significance traders will place on the move.

High volume suggests a heightened interest in a stock. More people are looking to buy and sell. Thus creating a large flow of money and increased amount of transactions.

If the increased volume is combined with a significant move higher or lower in the share price, it is often viewed as a signal of strong momentum in that direction.

SQ volume spike

Chart: thinkorswim

The increased volume in the chart above is coupled with a price move down. The volume is confirming the significance of the move and trader confidence in the direction of price.

Volume Spikes

You will notice that the volume of a stock is usually higher around news and other big events. This is due to the new information being released.

The information is then factored into investors’ views on buying, selling, or holding the stock. This creates more transactions than usual as they adjust their portfolios.

Traders use this spike in volume to make quick decisions based on the price action and volume associated with it.

It’s a good idea to keep an eye out for these types of events because they will provide ample trading opportunities.

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

Pay attention to price spikes around these events. Use the increased volume with other analysis to find meaning behind the moves.

Technical Analysis of Stock Volume

Stock volume is loaded with valuable insights into the movement of stocks. Unlocking this value takes practice. But knowing a little bit about technical analysis will go a long way when using volume as an indicator in your trading.

A few helpful volume indicators to look at are average volume, price/ volume divergences, and on balance volume.

Average Volume

Volume alone is just a number. One million shares traded a day may be high for one stock but low for another.

GM has an average daily volume of over 8 million. Jack in the Box on the other hand has an average daily volume of half a million. So 1 million shares of Jack in the Box traded in a day doesn’t mean the same thing as 1 million shares of GM.

Being able to put volume into perspective is key. Average volume provides a reference point.

The average volume of a stock over a period of time is the total volume in that period divided by the length of that period. You want to compare volume to recent time frames as the volume from years ago may not relate to the volume today.

Common periods used for average daily volume are 20 days and 30 days, both relating to the volume over a month.

Average Daily Volume = Total volume over a specified period/ the length of days the period

Example: 200 million shares traded over 20 days = average daily volume of 10 million

Using the average daily volume, you can get a better idea of the significance of real time volume. In the example above, 50 million shares in a day compared to the average 10 million is significant.

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

FL large volume spikes compared to average volume

Chart: thinkorswim

The orange line in the bottom window is the average daily volume. The large blue volume spikes show a significant increase in volume on those days.

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

Price/ Volume Divergence

When a stock is moving higher in price, it will need increased buying to keep pushing prices up. Increasing price with decreasing volume is called divergence. It shows a lack of interest in the stock. As the buyers leave, volume dies out and the price will not have the support it needs for a continued move up.

GOOGL volume decline with volume spike reversal

Chart: thinkorswim

In the above chart, you can see the stock price trending up while volume is trending down. This is showing the buyers are losing interest. The blue ovals show a large increase in stock volume with a big move down.

With the move down happening after the divergence showed a lack of buyers. The increased volume adds another level of significance to the move down.

Keeping an eye on stock volume will keep you on the right side of the trade.

On Balance Volume (OBV)

On Balance Volume (OBV) measures buying and selling pressure as an indicator. To do this, it adds volume on up days and subtracts volume on down days. It then provides a running total of this number pointing towards accumulation or distribution.

The number value of OBV has no relevance. Focus on the direction of the indicator. This is where the value lies.

TLRY On Banlance Volume analysis

Chart: thinkorswim

The green line in the bottom window is the OBV. The red trend lines show the price of the stock and the OBV are moving in the same direction. This is used as a confirmation of the trend. You can also see other volume indicators in this chart.

The blue ovals show spikes in volume that alert you to the significance of the move. After those spikes you can see the OBV confirming those trends.

Final Thoughts

Stock Volume is a simple and easy concept to grasp. At the same time is 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.

There is a lot of insightful information to be gained by studying stock volume. With the number of different volume studies and indicators out there, it will serve you well to become familiar with them. As with anything, only use what works for you.

To become a successful trader, you will need an arsenal of tools that work for you and your personal trading style. At the same time, don’t over do it. Simple is usually better.

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

If you aren’t comfortable with your knowledge of stock volume or patterns. Let me do the heavy lifting. Click the link above and I’ll teach you simple and proven stock trading patterns that will make you money right now.

 

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