- What is Trade Volume?
- How Does Trade Volume Work?
- The Importance of Trading Volume
- How is Trading Volume Statistics Measured?
- How Trade Volume Affects Stock Price?
- When do you see High Trading Volume?
- Importance of Trade Volume to Trader
- Final Verdict
What is Trade Volume?
Volume is regarded as the number of shares of stocks that have taken a different turn within a particular period. More investors are said to show interest in purchasing and selling stocks that have larger volumes.
The volume of trade is defined as the total number of contracts or shares that are traded for a certain security.
Also Read: High Frequency Trading
How Does Trade Volume Work?
Trade volume works by measuring and quantifying the total volume of shares bought and sold for a particular security during a given period of time. It factors in the total number of shares transacted.
Trade Volume can also be called the volume of trade. It is a volume data indicator that shows market liquidity and quantifies market activities.
The Importance of Trading Volume
The biggest stock exchange in the world is the New York Stock Exchange, with a trading day volume ranging in billions. Technical analysts use trading volume data as a tool to justify changes in price.
A significant change in price without a change in the overall trading volumes most times means that such price changes are temporary. High volume trade can sometimes mean a trend reversal.
How is Trading Volume Statistics Measured?
Trading Volume statistics are measured by the number of finance assets exchanged during a trading day.
In the futures and options contracts markets, trading volume is estimated using the number of contracts traded. In the stock exchange, it is measured using the number of shares exchanged in every transaction.
For example, a market is made up of two traders (first trader and second trader). The first trader buys 100 shares of stock ABC and sells 100 shares of stock’s XYZ.
second trader is a buyer of 100 shares of XYZ and sold 500 stocks of GHI to the first trader. The total volume of shares traded in this example is 600
A transaction occurs when a buyer who is willing and able to pay buys an asset for a specified price. The aggregate of all these transactions makes up the trading volume information.
An estimate of trade volumes is reported every hour, and at the end of the trading day, another estimate is reported.
The accurate trading volume is released the following day. The security’s tick volume shows the specific number of changes in the price of the security.
How Trade Volume Affects Stock Price?
If there is high demand for a stock, the trade volume would rise due to buying pressure, and high demand would push the price of the stock up.
In the case where a stock’s price is falling and it has a high trading volume, this simply means that is supply pressure and investors are selling their securities.
The one daily timeframe gives a clear and more accurate trade volume. Fundamental news sometimes plays a role in trade volume figures.
If the trade volume of stock suddenly pumps or falls, the company might have released someone’s information to trigger investors to buy or sell their securities.
When do you see High Trading Volume?
Right after the market opens volume then be very high with a high spread as well, and before the market closes there is always high trading volume. Fundamental news such as economic news tends to cause high volume as well.
Sometimes trade volume goes up when price breaks out of a trading pattern of formation. Most spectators respond to price action and technical analysis.
A bullish or bearish candlesticks pattern can affect trading volume because high-frequency traders would push trade volume up. High-frequency traders are high volumes traders.
Importance of Trade Volume to Trader
When trading the market, trade volume is a common tool used by traders. When there is a large movement in price, traders tend to check the trade volume of that asset to ascertain the cause of price changes.
High volumes followed by a change in price help strengthen support of the value of the security.
Trade timing can be improved by trading volumes which helps traders decide on a particular time for a transaction.
The long-term or short-term average trading volume of security can help traders make decisions on trade timing. Some technical momentum indicators make use of trade volume to function properly.
High-frequency algorithmic trading and Index funds are major drivers that cause higher trading volumes in market trades. The market Index is tracked by index funds which include mutual funds or exchange-traded funds.
An increasing volume or decreasing volume of stocks within a given time period can be used as an order execution indicator for investors.
Market volume is a useful tool to traders which market conditions and a drastic price change of stock during trading hours
An investment strategy can be implemented using trading volumes for a period of time. A big change in the value or price of a security with a low volume causes doubt for investors, but with a higher volume traders and investors would be confident in the price.
Some markets suggest that buyers are attracted to commodities with increasing volumes. Falling price with high-frequency trading means that they are very few buyers in the markets. Prices tend to respond to trading numbers, as trading numbers are the major determinant of price. Higher prices without quantitative data can be considered temporary, while low prices with low quantitative data can be considered insignificant. A new low back with high volumes could give a good bearish trend. A higher price with decreasing volumes could lead to a change in market trends.
Past performance is not an assurance for future results. Volumes are good indicators when monitoring the price of a particular stock, asset, or commodity. knowing the amount of liquidity and the current value, indirectly tell the direction money is flowing towards. Higher volumes with a price lower than the previous day could mean that is a lot of sell pressure, volumes with rising prices indicate buying pressure.
Also Read: How To Use Volume Price Analysis
What Does Trade Volume Indicate?
Trade numbers is a market momentum indicator; it tells how strong the market is with regard to stocks. In cases where stocks are higher prices, trade volume denotes strength. A high trade volume indicates the direction in which the market is shifting.
Trade volumes are not indicators of trends that go on in the market. Investors are charged with the responsibility to discover the reason for trend reoccurrence.
What is a Good Trading Volume?
No one has been able to pinpoint what a good trade volume is because there is no specific definition. Reasons like new items or stock splits might be a reason for the increase in trade volumes.
In the process of evaluation of stocks pay attention to volume and see it as the big picture. Volume is used in combination with some features like the decline and increasing rate of stock price to see the big picture.
Is a High Trade Volume Good?
A stock whose volume is appreciating on a high level will most likely have better sustainability. But a stock can be something called a “dead cat bounce” if it is appreciating a low volume. When stock prices are moved by money, the demand for those stocks is high.
So, there will be a low sustainability level for the stock price moving with less money. In essence, high trading volume is good and investors should look out for stocks in this category.
How is Trade Volume Calculated?
Trade volume is not quite easy to calculate but once you get the hang of it, everything would be fine. Trade volume consists of total shares that have shifted over a certain period of time.
The trade volume is calculated using some complex formulas that are based on the price of the stock and the number of traded shares.