All you need to know about volume

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What is ‘Volume’

Volume is the number of shares or contracts traded in a security or an entire market during a given period of time. For every buyer, there is a seller, and each transaction contributes to the count of total volume. That is, when buyers and sellers agree to make a transaction at a certain price, it is considered one transaction. If only five transactions occur in a day, the volume for the day is five.

Volume as Indicator ‘Volume’

Volume is an important indicator in technical analysis as it is used to measure the relative worth of a market move. If the markets make a strong price movement, then the strength of that movement depends on the volume for that period. The higher the volume during the price move, the more significant the move.

This is a list of the most and least actively traded stocks in the S&P 500 measured on a daily basis. Since it changes throughout the day, add stocks to your personal watchlist so you can track their volume and other metrics whenever you want.

Highest Volume Stocks in the S&P 500
Add Symbol Volume Price
GE 100.73M 20.49
General Electric Co
BAC 61.11M 26.51
Bank of America Corp
T 57.48M 34.22
AT&T Inc
Lowest Volume Stocks in the S&P 500
Add Symbol Volume Price
MTD 167,847.00 622.66
Mettler Toledo International Inc
AMG 239,455.00 184.36
Affiliated Managers Group Inc
AYI 242,317.00 160.18
Acuity Brands Inc

 

Fundamental analysis is based on company performance and is used to determine which stock to buy. Technical analysis is based on price and is used to determine when to buy. Technical analysts are primarily looking for entry and exit price points, and volume levels provide clues about where the best entry and exit points are located.

Volume Trends Confirm Strength

Volume is one of the most important measures of strength for traders and technical analysts. Put simply, volume refers to the number of contracts traded. For any trade to occur, the market needs to produce a buyer and a seller. A transaction occurs when buyers and sellers meet and is referred to as the market price. From an auction perspective, when buyers and sellers become particularly active at a certain price, it means there is a lot of volume.

Analysts use bar charts to quickly determine the level of volume. Bars also provide easier identification of trends in volume. When bars are higher than average, it is a sign of high volume or strength at a particular market price. In this way, analysts use volume as a way to confirm a price movement. If volume increases when the price moves up or down, it is considered a price movement with strength.

Example

If traders want to confirm a reversal on a level of support, or floor, they look for high buying volume. Conversely, if traders are looking to confirm a break in the level of support, they look for low volume from buyers. If traders want to confirm a reversal on a level of resistance, or ceiling, they look for high selling volume. Conversely, if traders are looking to confirm a break in the level of support, they look for high volume from buyers.

Volume Of Trade

Volume of trade is the total quantity of shares or contracts traded for a specified security. It can be measured on any type of security traded during a trading day. Volume of trade or trade volume is measured on stocks, bonds, options contracts, futures contracts and all types of commodities.

BREAKING DOWN ‘Volume Of Trade’

Volume of trade measures the total number of shares or contracts transacted for a specified security during a specified time period. It includes the total number of shares transacted between a buyer and seller during a transaction. When securities are more actively traded, their trade volume is high. When securities are less actively traded, their trade volume is low. Each market exchange tracks its trading volume and provides volume data. The volume of trade numbers is reported as often as once an hour throughout the current trading day. These hourly reported trade volumes are estimates. A trade volume reported at the end of the day is also an estimate.

Final, actual figures are reported the following day. In the meantime, investors can use tick volume, or the number of changes in a contract’s price, as a surrogate for trade volume, since prices tend to change more frequently with a higher volume of trade.

A stock volume that closes at a price lower than the previous day’s close. Down volume occurs when a stock finishes a day of trading at a level lower than its open. That means the trading volume for the day was more bearish than bullish.

Also referred to as “down on volume.”

BREAKING DOWN ‘Down Volume’

If a stock closed at a price lower than the previous day’s close, the share volume for that day would be considered down volume. Quite often market participants refer to a day of overall market down volume as a day of bearish volume, due to an overall bearish sentiment sending markets down. Typically days of down volume are more heavy in terms of overall volume than up days.

Average Daily Trading Volume – ADT

The average daily trading volume (ADTV) is the amount of individual securities traded in a day on average over a specified period of time. Trading activity relates to the liquidity of a security. When average daily trading volume is high, the stock can be easily traded and has high liquidity. If trading volume isn’t very high, the security will tend to be less expensive because people are not as willing to buy it. As a result, average daily trading volume can have an effect on the price of the security.

BREAKING DOWN ‘Average Daily Trading Volume – ADTV’

When average daily trading volume increases or decreases dramatically, this is a signal that there has been some news released that has affected people’s views on the security. Usually, higher average daily trading volumes mean that the security is more competitive, has narrower spreads and is typically less volatile. Stocks are less volatile when they have higher average daily trading volumes because much larger trades would have to be made to have an effect on the price.

Trading Volume and Market Liquidity

The average daily trading volume is an often-cited security trading measurement and a direct indication of a security’s overall market liquidity. The higher the trading volume is for a security, the more willing buyers and sellers there are in the market and it is easier and faster to execute a trade. Without a reasonable level of market liquidity, transaction costs are likely to become higher, which in turn discourages trading activities and further reduces liquidity. It is usually the case that the more widely held a security is, the higher its market liquidity may be.

Volume Analysis

The examination of the number of shares or contracts of a security that have been traded in a given time period. Volume analysis is used by technical analysts as one of many factors that inform their trading decisions. By analyzing trends in volume in conjunction with price movements, investors can determine the significance of changes in a security’s price. Volume typically increases as price increases and vice versa; when the opposite occurs, it’s called divergence.

BREAKING DOWN ‘Volume Analysis’

A significant price increase along with a significant volume increase, for example, could be a credible sign of a trend reversal and could incite an investor to buy or sell. On the other hand, a significant price increase with low volume might just be a temporary uptick in an otherwise downward trend. In this case, the investor may not want to act.

Net Volume

A term in technical analysis that represents a security’s uptick volume minus its downtick volume over a specified period. The net volume of a stock is a consolidated total of the positive and negative movements of the security over the period. A stock that is said to have had a positive net volume over a given period will have seen greater upward movement in its price than downward.

BREAKING DOWN ‘Net Volume’

Net volume is an indicator that is also very similar to the idea of money flow. Along with other such indicators, the aforementioned “money flow index” is a useful indicator of net volume. Often traders use such an indicator to judge the momentum or trend of a stock in order to make assumptions about its future price movements.

Uptick Volume

The volume of shares of a security that are traded when the price is increasing. Uptick volume is used in trading strategies based on trends, with the difference between uptick volume and downtick volume referred to as the money flow. Stocks with positive momentum will trade at an increasing uptick volume as current trading prices are above the average price.

BREAKING DOWN ‘Uptick Volume’

Uptick volume can be used in momentum trading or to be analyzed as resistance bands. In a scenario in which ticks are increasing, investors may look at a security as having more buyer demand than the number of shares being sold. This is a bullish strategy that depends on the continuous rise in prices.

Market Momentum

A measure of overall market sentiment, calculated as the change in the value of a market index multiplied by the aggregate trading volume occurring within the index components.

BREAKING DOWN ‘Market Momentum’

Market momentum can be a good indicator of overall market changes which are likely to continue in the near future. It is important to understand that momentum considers not only changes in price level, but also volume. For example, if the Dow Jones Industrial Average (DJIA) was up significantly over several trading days, this price movement would be said to have more force, or momentum, if it occurred with heavy trading volume as opposed to low volume.

Volume Discount

A financial incentive for individuals or businesses that purchase goods in multiple units or in large quantities. The seller or manufacturer rewards those buying in bulk by providing a reduced price for each good or group of goods. Volume discounts allow businesses to purchase additional inventory at reduced cost, and allow sellers or manufacturers to reduce inventory by selling more units to incentivized buyers.

BREAKING DOWN ‘Volume Discount’

Volume discounts allow buyers to purchase goods at a discounted rate. These savings are often passed on to consumers. For example, Wal-Mart is able to purchase such large quantities of each particular good that it routinely receives volume discounts from its vendors. Wal-Mart’s customers, in turn, are able to purchase these goods for less money than if they went to a store that did not buy in such great volume. Volume discounts are often tiered; that is, a specific discount is applied to X number of units. The discount increases as the number of units is increased.

Some brokerage firms offer volume discounts on commissions charged depending on the level of investment or trading activity.

Equivolume

A chart that compares price and volume and plots them together as one piece of data. The height of each bar represents the high and low for each period and the width represents the volume relative to the total shares traded over the time period being analyzed.

Volume 1

BREAKING DOWN ‘Equivolume’

This type of chart is very similar to Japanese candlesticks except that volume is incorporated into the data point rather than added as an indicator on the side. Generally, a wide bar is deemed to be more significant than a thin bar because large volume usually precedes a significant price move.

Source: investopedia.com

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