Investing > Complete Guide to Stock Volume

Complete Guide to Stock Volume

Not sure how stock volume works? You're missing out on one of the most underrated tells in stock trading.

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Updated March 18, 2021

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Stonks only go up. Right?

Unfortunately, that’s not exactly how it works.

No one wants to follow the herd that’s chanting “stocks only go up” until they are plunged off a cliff when the market falls. 📉

To help protect yourself from herd mentality, it is important to learn about stock volume, especially since trading volume has already set records in 2021.

Understanding volume provides key insights about supply and demand, which can help you become a savvier and wealthier trader. In Technical Analysis Plain and Simple, Michael Kahn argues technical analysis is so important but misunderstood that it should be renamed “supply, demand, and reaction analysis.” 

Including volume analysis in your repertoire will help you know when to find protection from the herd and when to split off and save yourself and your money. Once you understand volume analysis, you can acquire other technical skills to make you a sharper trader. 

So you’re convinced stock volume is important, now turn up the technical and learn more about stock analysis. In the following, we’ll examine what volume is, why it is important, and how to use it to become a rockstar trader rather than a lemming. 

What you’ll learn
  • What is Stock Volume?
  • Stock Volume and Liquidity
  • Finding Volume on a Chart
  • Stock Volume vs. Average Volume
  • Trading Volume vs. Dollar Volume
  • Relative Volume
  • How to Use Stock Volume
  • Bullish Markers
  • Breakouts
  • Reversals and Consolidation
  • Cumulative Volume
  • What's a Good Stock Volume?

What is Stock Volume? 🔊

In the digital age, it can seem like stocks are metaphysical entities that take what the Tooth Fairy left—nothing with actual volume. So what is stock volume? 

Simply put, stock volume is the total number of shares traded within a specified period of time. Since institutions and individuals are doing the actual buying and selling, stock volume also provides insights into herd behavior. In addition to volume, there are plenty of other technical tools to use when trading stocks

Stock Volume and Liquidity ⚖️

Everyone wants their money to flow as easily as water but to also be invested so to get a good return. This is why many people invest in assets that can be easily liquidated (turned into cash). In the stock market, one of the best indicators of liquidity is volume, and now that higher rates and the spectre of inflation is spooking the market, ensuring your stocks have good liquidity is all the more urgent. 

The higher the volume, the more likely a trader can buy and sell the stock quickly and at a fair price. For individuals, high volume limits an institution’s ability to affect stock price by buying or selling in large volumes.

Volume is also important for institutions since high-frequency trading algorithms can pre-empt an attempt to liquify a position. These algorithms are kinda like HAL in 2001: Space Odyssey—they take control and lower bid prices, turning a ten-million-dollar transaction into a nine-million-dollar transaction. This is called “slippage” and can make any investor feel like a bone-wielding ape.

For both individual and institutional investors, it is important to be able to sell quickly and at the right price, which makes volume a cornerstone of strategy. No one wants a liquidity risk. To limit this risk, and possibly prevent HAL from usurping the power of your investment, find a top-notch stock trading platform with the right tools for you. 

Finding Volume on a Chart 🗺

You know what’s easier than reading ticker tape? Our more modern method of reading stock charts. Charts provide a visual representation of a lot of information, making it easy to find volume data on individual stocks and the market at large. 

Volume is located in at least two places on or near a chart. The volume listed in the statistics table is the volume of the previous day, since the exact daily volume is unknown until the market closes.

The graph at the bottom of the chart, which typically consists of green bars and red bars (cue the holiday music), shows an asset’s volume for a designated time interval— minute, month, year, or more. The green bars represent purchased volume, and the red bars represent sold volume. 

Stock volume
Stock volume as shown on a price chart on TradingView.

Stock Volume vs. Average Volume 📊

If stock volume is the number of shares traded within a certain timeframe, the average volume is the total volume divided by the number of intervals being calculated.

For example, the ten-day average of the speaker company Sonos (SONO) is 3.566 million, which is calculated by adding up the volume of each of the previous ten days and then dividing that number by ten. It’s as easy as doing third grade math while a squad of cheerleaders shouts “Let’s get a little bit louder.” 

X-days total / X = Average Volume

Trading Volume vs. Dollar Volume 🔎

The new Bitcoin ETF delighted investors when it debuted with $165 million in trading volume. So what is dollar volume?

The dollar volume is the total cost of traded shares and is calculated by multiplying average trading volume by price. For example, the bitcoin ETF (BTCC) currently has a ten-day volume average of 263,329 with a price of $11.86/share, making the dollar volume $3,123,081.94. The dollar volume helps determine the risk level of an investment. Higher dollar volume stocks are less risky than low dollar volume stocks.

In this case, dollar volume can be calculated like so:

Average Trading Volume x Stock Price = Dollar Volume

You might be asking yourself, what stock price do I use—high, low, opening, close? Using any of those prices will give you a sense of the dollar volume, as long as you are using current data and the stock price hasn’t taken shareholders on a rollercoaster ride with spine-tingling ascends and hair-raising freefalls. 

However, it’s better to take a daily average and compare it to the average price for a relevant past period—this will give you a fuller picture and let you spot any occurring trends. This might take more time to research but it is far more useful than looking at the opening price of a stock one day and acting like it is representative of past and future prices.

Relative Volume Explained 💡

Relative volume, or RVoL, is a comparison between current trading volume and average trading volume, which is often called “normal” or “past” volume. For example, if Tesla’s 10-day average volume is 33.875 million but has a current volume of 72.846 million, the relative volume would be 2.1. This means the stock has been traded 2.1 times more than the 10-day average. 

To recap, here’s the calculation we’re using for relative volume:

Current Volume / Average Volume = Relative Volume

Increased trading activity often represents a significant rise or fall in a stock’s price—which is when day traders typically make their move. If a stock has a relative volume of less than one, it is considered inactive. A relative volume of two and above, however, indicates the stock is in play. If you’re ready to take on the risk of day trading, be sure to alleviate your risk by finding the best day trading broker

How to Use Stock Volume 👩‍🏫

Once you become an astute stock researcher, you can up your trading game with volume analysis. Stock volume drives market movement and can be the bond that makes the trend your friend. Volume helps traders spot trends and evaluate their credibility. 

Looking at whether or not stock volume and price are in a positive or negative correlation can provide traders with a wealth of information about the fundamental and/or psychological factors affecting a stock’s price. If the adage is true, “volume precedes price,” volume analysis can help you decide when to find protection or break from the herd.  

How Does Volume Affect Stock Prices? 💸

Investors are eager to see how market prices will be affected on a large scale now that tech-savvy retail traders have increased market volume, but we can get a general sense of how volume affects price with a couple specific examples.

Following SONO’s November 2020 earnings report, the stock volume spiked as if The Beatles were singing “Twist and Shout” to a herd of wild bulls. Well, maybe not that exciting, but there is a trend that stocks rise near earnings announcements, which is true for Sonos.

Sonos’ trading volume went from 9.44 million to 44.7 million, which caused the stock price to go from $17/share to $22.37/share. The price didn’t reach the moon, but it has been steadily rising since.  

Sonos stock volume and price increased
Sonos stock volume and price increased following November 2020 earnings report. Image by TradingView.

Similarly, when volume increases and price decreases, it suggests investors are trying to ditch their stocks like a hot potato before the music stops. Following Sony’s (SNE) February 2019 earnings report, which investors didn’t find promising, the volume and price bars were red. Over the course of a few days, the stock went from having a volume of 1.58M and a price of $50/share to a volume of 6.97M and a price of $44.65. 

Lucky for Sony investors, the outlook is better for 2021. To date, Sony is outperforming other discretionary stocks

Sony’s stock volume and price decreased following February 2019 earnings report. Image by TradingView.

Essentially, a noticeable increase in volume means that investors have found a stock interesting for some reason—either because they think it’s going up, or because they feel it might go down. Therefore, increased volume is neither a good or a bad omen—but in most cases, it means that something is going on and that the stock price will change, at least temporarily.

Bullish Markers 🐂

Bullish markers are signs a stock price will rise, and we’ve seen such signs when the GameStop stamped rode the escalator up to $380/share in late January. Although GameStop is far from a textbook example of a bullish stock, it is an interesting one. 

Even though the stock price fell in mid-February, the trading volume suggested many investors truly had “diamond hands” and were not selling, even though short-sellers exited their positions—at least in part. Additionally, GME’s new low at the time had not fallen to or below the previous low, which is another bullish trend. 

GME bubble
GME bubble followed by an increase in price after correction. Image by Tradingview.

The trend has continued in March, although experts explain GME’s second surge is a gamma swarm, which basically means traders have pumped up the volume of the stock by buying a lot of call options. The gamma swarm tactic throws a monkey wrench into our traditional understanding of supply and demand, which can make it more difficult to know when a stock has reached its market top.

Exhaustion 💤

Every Girl Scout who has ever gotten a late start on cookie season knows about market exhaustion. Every knocked door is opened by someone who already ordered cookies from another scout. Sigh… 

When a stock reaches its market top, all the buyers have been exhausted, and the stock price is usually too high to lure in new buyers. Exhaustion is usually seen with dramatic price increases coupled with heavy volume, and it is often followed by a trend reversal. 

Spotting Breakouts 📈

Stock breakouts don’t involve a prisoner finding their freedom, but they do involve support and resistance, which you can think of as a tug of war between bulls and bears. When bulls have the longer end of the rope, the resistance threshold is established (a price point a stock has difficulty passing). When the bear has the long end of the rope, the support threshold is established (a price a stock doesn’t typically fall below).  

Breakouts occur when the herd changes its perspective about a stock, which propels the stock price above it’s area of resistance or below its area of support. The easiest way to catch the next breakout and make a bunch of money is to watch the stock you like on a top-tier trading app and wait for your moment. 

Traders give high-volume breakouts more credibility. More volume also suggests the trend will follow the direction of the breakout—above the resistance threshold or below the support threshold.  

Example of high volume breakout
Example of high volume breakout. Image by TradingView.

If there is little or declining volume corresponding to a breakout, investors consider it less credible. Low-volume breakouts could be a sign of a false breakout, although this is not always the case now that algorithms can pinpoint triggering prices as easily as a Vulcan can read minds.

Reversals and Consolidation 🎯

A reversal marks an end of a trend. While it is difficult to know if the market is in an actual reversal or a continuation pattern, investors look to volume and candlestick charts, which is a viewing option on nearly all stock charts.

Oftentimes, the time of the heaviest volume is an indicator that a reversal is on the horizon, especially if accompanied with a “shooting star” or “hammer” candlestick. 

Shooting Star and Hammer
Understanding ‘shooting stars’ and ‘hammers’ in candlestick charts.

However, if the stock does not reverse or continue following the trend, it is in a state of consolidation, also called congestion or correction. Think of it like being stuck on the freeway in bumper to bumper traffic and there’s no sign of an exit. Pretty frustrating. 

Since it’s difficult to know if the bulls or bears will be more aggressive coming out of consolidation, investors often wait to see which beast finally pulls the rope out of the other’s grip. But the savviest investors learn how to use Swing Trading to their advantage. 

Usually the winning animal was the less aggressive animal during the previous trend. This is often the case because the consolidation gave the investing herd time to reevaluate their position and change directions. 

Sometimes, however, a stock price will change against the trend, and if there is little volume, there is a chance the stock price will “pullback.” A pullback basically means the price trend will likely continue on its course rather than reverse.

Cumulative Volume (On-Balance Volume) 📚

Using a simple volume chart makes it difficult to see if the bears or bulls are dominating the market. Thus, many traders rely on cumulative, or on-balance volume (OBV) to get a better picture of supply and demand. 

OBV is the running total of daily volume. The cumulative volume works on the assumption that prices and volume work in tandem (higher prices indicate more purchase volume and lower prices indicate more sell volume). 

To calculate OBV, volume is added to the total when a stock price rises during a specified interval and subtracted when the price falls. However, price and volume don’t always play on the same team. When price and cumulative volume split directions, a divergence occurs. 

Amazon recently experienced a divergence, which has led some analysis to wonder if Amazon has spent too much time below the 200-day average. Since Amazon’s OBV line started slouching in February, it might be that the bears win this tug-of-war match. 

A divergence can be an opportunity, as it often signals a reversal or weaker price trend. However, most analysts recommend that OBV is only one of many tools you use to determine whether or not to enter or exit a position.

Summary: What’s a Good Stock Volume? ✅

Stocks that have little volume are not only more difficult to liquidate, but can also be manipulated more easily by institutional investors—causing the price to spike with large volume purchases or causing the price to plummet with large volume selloffs.  

Generally speaking, a stock should have a 50-day volume trading average of 400k or more and a minimum of 20-million in dollar volume. If the dollar volume is even bigger—in the hundreds of millions—there is even less risk you’ll end up holding the bag in a selloff.  

Stock Volume FAQs

  • Which Stock Exchange Has the Highest Volume of Shares Traded?

    The New York Stock Exchange has the highest volume of shares traded. The monthly traded volume in 2019 was 1,452 billion.

  • Is High Volume Good for Stocks?

    High volume can be great for stocks, especially if the volume represents purchased shares. It also adds liquidity to the stock, which means it is easy to buy or sell since there are many investors interested in it.

  • How Do You Measure Stock Volume?

    Stock volume is the total number of shares traded within a specified period of time, and thankfully computers calculate this for us. Volume can be measured on a daily and even hourly level, but also in a broader timeframe. 

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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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