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Article Reviewed on July 21, Gordon Scott Updated July 21, In trading, the term volume represents the number of units that change hands for stocks or futures contracts over a specific time period. Traders rely on it as a key metric because it lets them know the liquidity level of an asset, and how easily they can get into or out of a position close to the current price, which can be a moving target. The two key concepts behind volume analysis are buying volume and selling volume.
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Buying Volume When trading volume is higher, you'll have an easier time buying and selling large or small quantities of stockbecause other traders are in the market, waiting to fulfill the other side of your trade. Each transaction must have a buyer and a seller.
To buy a stock, for example, a seller must sell to you, and for you to sell, a buyer must buy from you. This leads to some confusion because you'll often hear phrases like: The sellers are in control Buying volume is outstripping trading volume volume Trading volume a heavy buy volume day Buyers have control when the price gets pushed higher.
Buy volume occurs at the offer price, and represents the lowest advertised price at which sellers will part with their shares. When someone buys shares at the current offer price, it shows that someone desires the stock and is included in the buying volume metric. Sell volume occurs at the bid price.
Volume of Trade
The bid represents the highest advertised price buyers will offer. If someone wants to sell at the bid price, it shows that the seller doesn't desire the stock trading volume demonstrates an example of selling volume. Charts depict trading volume in vertical bars, with the bar showing how many shares changed hands over a particular time period. The image below is a trading example of a 1-minute chart, where each volume bar along the bottom shows how many shares were traded in each one minute period.
The volume bars on a daily chart show how many shares change hands during the course of each day. A red volume bar means the price declined during that period and the market considers the volume during that period as selling volume estimated.
If the volume has a green bar, then the price rose during that period and it is considered by the market as buying volume estimated. Relative Volume Traders prefer day trading stock with volume as it allows you to get into and out of a position quickly, with large or small positions.
The average volume statistic shows how many shares change hands in investments on a normal day. Some days will have a much higher volume than normal, while other days see a lower volume.
- By Steven Nickolas Updated Mar 29, Trading volume is the total number of shares of a security that were traded during a given period of time.
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- Updated Apr 25, What is Volume of Trade Volume of trade is the total quantity of shares or contracts traded for a specified security.
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Lower-than-average volume shows lower interest in the stock on that day and likely smaller price movements. Such days usually have volatility trading volume large price moves either up or down. If most of the volume takes place at the bid price, then the price will move lower and the increased volume shows that sellers are motivated to get rid of the stock.
If most of the volume has taken place at the ask price, then the stock price will move higher due to demand and price availability. The increased volume shows buyers believe the stock is moving, and want to purchase the stock.
Using Trading Volume to Understand Investment Activity
Increased volume typically shows that something has happened with the stock. Typically, a news release or active traders that have become worried or euphoric about the stock's potential suddenly influence volume trading.
Analyzing Stock Price Movements While not necessary, monitoring a stock's trading volume can aid in analyzing stock price movements. You may trading volume the following guidelines and descriptions helpful for understanding and analyzing volume.
An increasing volume shows the conviction of buyers and sellers in either pushing the price up or down, respectively. For example, if the stock trend heads up and volume increases as the price moves higher, it shows buyers have an eagerness to buy; this typically happens with larger moves to trading volume upside positive returns.
A trend can persist on declining volume for long periods of time, but typically declining volume as the price trends indicates the trend is weakening. For example, if the trend heads up but volume steadily declines, it shows fewer people want to buy and keep pushing the price up. That said, the trend won't change until more large-scale selling volume than buying volume takes place. This shows strong movement in the trend direction and weak pullbacks, making the trend more likely to continue.
These are termed exhaustion moves—when enough shares change hands that no one remains trading volume keep pushing the price in the trending direction, it will often quickly reverse.
If used for nothing else, volume analysis is useful to help isolate stocks you're considering for day trading. Ideally, your day trading stocks should have more average binary options probabilities strategy so you can enter and trading volume easily.
It also makes collecting your profits easier because many other traders trading volume want to take your position buy from you when you sell when you are satisfied with your profits.
Volume can also be used to analyze the trend of a stock, helping to assess the likelihood that a trend will continue. 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.
Trading decisions should be based on price movements first and foremost, as price movements determine profits and losses. Formulate your stock day trading strategy based on price movements, and then add in volume analysis to see if it improves your performance.