Understanding Stock Volume & Why It Matters in Day Trading

Stock Volume is an important concept in the financial market. It refers to the average number of shares that are being traded in a certain period. As such, it is one of the most popular and important concepts that professional traders use. This is because, as you can imagine, the volume of a stock has a strong impact from several points of view (such as shares liquidity and volatility).

In this article, we will look at what stock volume is, some popular volume indicators for the analysis phase, and how to use it in day trading by incorporating it within your strategy.

Firstly, let’s explain the general concept more thoroughly.

Stock Volume Meaning

As mentioned, stock volume is the number of shares that are being in a certain period of time. Ideally, a stock that is rising and one that has a high volume is said to be a better buy than one that is rising with low volume. This is simply because it means that the rising trend is being backed by volume. On the other hand, a falling volume in a stock whose volume is falling is often a sign that the price could start falling.

But then.. what does a stock volume mean?

It is worth noting that, in stocks, volume can mean different things. For example, it can man the number of shares that are being traded in a certain period. It can also refer to the number of options contracts and the number of shares traded within an index in a certain period.

Volume in stock market: key featuers

A single-day volume is a useful feature. However, it usually does not tell the real story. For example, if 1 million shares of a company are traded in a given day, it means nothing. However, if the 20-day moving average of this volume is 300,000, it means something. It reflects a fact that something could have pushed more people into the stock.

Another notable item is that volume is calculated once. For example, if there are two traders and one sells 1,000 shares and the other buys 1,000 shares, it means that the volume is 1,000.

Volume in other assets

Volume is an important concept not only in stocks. It is common across other asset classes like cryptocurrencies, commodities, and currencies

Ideally, you should trade stocks that have a higher volume because it shows how liquid they are. For example, if you are a penny stock trader and you buy 1 million shares of a company. At times, you might find it difficult to find someone to sell the shares to when you want to exit the trade.

Where stock volume data comes from

Another important question is where the data on volume comes from. To answer it well, you need to first understand how the stock market works and the players involved.

First, there is you, the trader, and a seller. Second, there is a stockbroker, who provides the trading platform. Examples of brokers are Robinhood, Fidelity, and Schwab, among others.

Third, there are market makers, which are companies that match buyers and sellers. These are companies that actually implement the trades. Examples are Citadel Securities and Virtu Finance. Finally, there are the exchanges themselves. These are companies like Nasdaq and the New York Stock Exchange (NYSE).

Therefore, whenever someone buys shares, the transaction is recorded as volume. Traders can therefore use this data to see the trend in volume.

»Direct Market Access vs. Retail Trading«

How to get volume data in stocks

Another aspect is where one can get the data on volume when trading stocks. There are many places. For example, you can use the volume indicator tool that is provided by your broker.

Alternatively, you can use tools like YCharts and Barchart that compile this information. The chart below shows stocks that had the most volume on May 14, 2021. The list includes companies like AMC, Apple, and Plug Power, among others.

As mentioned above, the daily volume is only important when it is put into perspective. On the chart below, we see the volume trend of AMC shares. As you can see, the company was thinly-traded in the fourth quarter of 2020. The volume rose sharply during the Wall Street Bets fiasco, and then faded. It then rose in April after the company raised money to finance its operations.

AMC stock volume

Volume indicators in trading

There are several indicators that help you to take advantage of volume when trading stocks. Some of these are:

The chart below shows the AMC stock with the volume and percentage volume oscillator indicator.

Most active stocks (and not)

As mentioned above, volume is important in the market. And as a day trader, you should focus on companies that have a relatively high amount of volume instead of those that are thinly traded. This is because these stocks are more likely to have fluctuations that can be exploited to generate some profit.

Some of the highest volume stocks are companies in the technology industry like Apple, Netflix, Facebook, and Nvidia. On the other hand, some low volume stocks are small companies in industries that are not popular like farmlands and the industrial sector.

Causes of high volume in stocks

There are several key causes of volume in the stock market. Some of these are:

  • Earnings – In most cases, the volume of a stock increases during the earning season since this is when more people and investors are buying or selling.
  • M&A news – The volume tends to rise when there is mergers and acquisition activity.
  • Company-specific news – Volume tends to increase when there is company-specific news like management changes and new entrants of a competitor.
  • Fiscal and monetary policy – Policies by the government like stimulus and those of central banks like rate cuts and QE can lead to higher volume.

Conclusion: volume matter for day traders?

The concept of volume is a relatively wide one. However, what you need to know is the importance of volume in the financial market. So… the answer is absolutely yes! Stock volume is one of the key factors to look at before starting a trade.

In this article, we have looked at what volume is, how to use it in day trading, and some of the indicators you can use. But given the breadth of the topic, we’ll have much more to say.

External useful Resources

  • What does volume in stocks indicate? – Quora
  • What is considered a bad volume? – Reddit/r/stocks

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