Trading Volume: Analysis and Interpretation

Unlike stock markets with centralized exchanges that provide accurate volume data, forex operates over-the-counter (OTC). As a result, determining precise overall trading volume is a bit more complex. In stocks, volume signifies the total number of shares that have been bought and sold within a given period. This metric is instrumental in determining the liquidity of a particular stock. High trading volumes often suggest robust interest and active participation in stock, while low volumes may signify stagnation or a lack of market interest.

  1. During fiscal 2024 (ended Jan. 28), Nvidia’s H100 GPU drove the company’s data center revenue to $47.5 billion, which was a whopping 217% year-over-year increase.
  2. When a trader witnesses increasing price but decreasing volume, this is an indicator that the trend is running out of steam and it could be indicating the start of a price reversal.
  3. Volume analysis isn’t perfect and it offers only supplemental information, so you don’t need to feel pressured to start analyzing volume to day trade successfully.
  4. In situations where trading volume is consistently low, adopting a scalping strategy that combines using level 2 market data to select entry zones can be advantageous.
  5. Trade volumes that are reported on an hourly basis are estimates.

Exhaustion Moves and Volume

Scan, chart, and strategize using any combination of indicators and timeframes. Chase’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you’re about to visit. Please review its terms, privacy and security policies to see how they apply to you. Chase isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the Chase name. A/D enables forex traders to assess the market’s overall sentiment towards a specific currency pair. You can also see from the chart above that volume tends to increase as the uptrend resumes, which is the overall trend direction on this chart.

Three Volume Indicators

The Volume indicator on a stock chart is usually expressed as a series of vertical bars on the X-axis of a chart. The changes in volume from day to day indicate that a stock is more in demand if the volume bar rises and the stock price increases or less in demand if volume drops on price decreases. An uptrend without increasing and/or above average volume suggests investor enthusiasm is limited. While the price could continue to rise, many traders who use volume analysis will nevertheless look for other candidates. Trading volume is defined as the number of shares traded in a particular period of time.

Downside breakout accompanied by heavy volume

Conversely, when NVI increases or decreases it means that prices are fluctuating with little effect from volume. High volume accompanied by sharp price movements against the trend signifies the trend is weakening, and/or is susceptible to a reversal. Did you ever scratch your head at the term “volume” while researching the stock market? Today, I’ll demystify this often-used but frequently misunderstood term. Indicators are not required, but they can aid in the trading decision process. There are many volume indicators to choose from, and the following provides a sampling of how several of them can be used.

What Is the Most Common Time Frame for Measuring Volume in Stocks?

Very popular ETFs are unlikely to have major lulls in volume prior to a breakout, and may not even have increasing volume on a breakout. Yet the stocks themselves, held within the ETF, will likely have volume increases on the breakouts (if they are likely to be legitimate breakouts). Another time we see declining volume is often before a big price move. Consider searching for stocks that have low average volume over the past several days, compared to a 30-day average, for example. And sometimes the price keeps rising even though there wasn’t much or any volume increase. But for myself, if I’m in a trade where there was a breakout and the volume didn’t increase I become very cautious.

Understanding Volume

When the price breaks out of the consolidation I’m buying, so I won’t know what volume looks like until the price bar closes. At that point, I get to see if volume increased on the breakout. If it did, I stick with my original stop loss and profit target. If volume didn’t come in, or the candle was weak, I will often move my stop loss closer to my entry because the breakout didn’t do what I wanted it to do. Unless volume comes in or the price moves strongly I’m more inclined to exit these trades and look for something else.

Price Down & Volume Down (PDVD)

The Alternative Harvest ETF (MJ), a marijuana stock ETF, peaked on 32x prior average volume in 2018. This article, on finding stocks that are making big moves after the opening bell, shows how to use relative volume on a stock screener. The strategies or analytical methods discussed can be employed on low-priced high-volume stocks, high-priced low-volume stocks, or anything in between. A large daily candle on high volume can often kick off a trend or accelerate it. See the Earnings Drift Trading Strategy for more on trading around earnings.

During an uptrend, for example, when the price pulls back to the VWAP that may present a buying opportunity. If the price crashes through the VWAP, watch out, a downtrend may be underway. If there was a big volume on a decline, when the price starts rising it probably won’t be on even bigger volume, but we want to see volume that is strong on the up days.

A downtrend accompanied by increasing and/or above average volume implies investors have doubts about the stock, which could lead to more selling and even lower prices. An uptrend paired with increasing and/or above average volume implies investor enthusiasm for that stock or asset is strong, which could lead to more buying and even higher prices. Contrariwise, below average and/or decreasing volume can signal a lack of enthusiasm, which you can see in Chart 2, where volume is declining even as the price continues to creep higher. Determining whether high or low buying and selling volume is good for you depends on your strategy and outlook.

As traders, we are more inclined to join strong moves and take no part in moves that show weakness—or we may even watch for an entry in the opposite direction of a weak move. In such a situation, the total trading volume in the market would be 350. It is because 100 shares of Alpha were traded, 50 shares of Beta were traded, and 200 shares of Gamma were traded. However, the question of whether volume and price are correlated is not yet answered. But you can easily find stocks, commodity futures, and even currency pairs that often move sharply with low trading volume. Normally, when you identify a significant volume spike in the market, you’ll enter a position in the direction of the volume bias.

For example, if shares in a security are traded 50 times in a day, the volume for the day is 50. Trade volume is an indicator of the market activity and liquidity of a given security, e.g., stocks, bonds, futures contracts, options contracts, as well as all varieties of commodities. It indicates that the market is highly active, which means that it is easy for buyers and sellers to communicate and execute transactions. Similarly, when a security is traded less actively, its trade volume is said to be low.

When the price passes through a key price level, such as above a recent swing high, volume should increase. If it doesn’t, the move isn’t as strong and caution is warranted. Low volume (comparatively) will often precede a large price move on larger volume. A day trader could have used the tactics discussed prior to buy the stock when it made a new high on increased volume. This opportunity presented up to $0.20 of profit potential on a $13 stock. Such opportunities could occur multiple times per day, especially if watching multiple stocks with these characteristics.

Sometimes even 5x typical volume signals a reversal may be near at hand. Sometimes ETFs peak or bottom on higher volume, and sometimes lower. This peaking and bottoming on high canadian forex brokers volume may also occur in stocks after a strong uptrend or downtrend. Look for volume increases, relative to what the stock usually does, on price moves to new highs or lows.

Tags: No tags

Comments are closed.