What is trading volume and how do you use it?
Rebecca Cattlin September 14, 2021 9:50 AM
Trading volume is a key metric used to assess activity levels across markets – including stocks and currencies. Find out why trading volume is important and how to use it in your trading strategy.
What is trading volume?
Trading volume is the total number of an asset that were traded during a given time period. It’s usually measured for exchange-traded assets, such as stocks, bonds, options, futures and commodities. Trading volume doesn’t just indicate how many transactions are occurring, but also includes the total amount of an asset that was bought or sold during the transaction.
Volume charts will be plotted depending on the time period selected. For example, you can view an hourly chart, daily chart or weekly chart. Hourly volume reports are usually only estimates, whereas the daily report happens after market close and is more accurate.
Why is volume important in trading?
Volume is important because it’s closely linked with liquidity, which has a direct impact on trader’s abilities to open and close positions quickly and at their desired price. The effects of volume change depending on whether volume is high or low.
What does high trading volume indicate?
High volume indicates that there are a lot of traders in the market. While this doesn’t necessarily mean that every trader will be placing the same positions, it is usually the case that there’s a trend occurring.
High trading volume indicates whether momentum is continuing. Typically, if trading volume increases then the market price generally moves in the same direction – but that’s not necessarily to say that high volume equals high prices, because you can get a high volume of short-sellers too.
High trading volume is seen as a significant benefit when it comes to liquidity as more people are on the market, willing to buy and sell an asset, so it’s more likely that you’ll be able to find a counterparty for your trade at your ideal price. Higher liquidity is also correlated to tighter spreads.
In periods of high volume, prices tend to change more quickly due to the sheer number of people making bids and offers on the asset. This is why some investors use tick volume, or the number of changes in a contract's price, instead of trade volume – as tick volume is available around the clock, whereas trade volume is only updated periodically.
What does low trading volume indicate?
Low volume indicates that there are fewer buyers and sellers on the market, which will translate to less liquidity. Low liquidity means you can get stuck in positions, unable to close out a trade and forced to accept increased risk of losses should the market turn against you. Low liquidity, particularly in the stock market, can also translate into higher bid-ask spreads.
How to use volume in trading
Volume is used as a technical indicator to get a better picture of the activity of a market, and the strength of trends. Using volume can help form the basis of decisions over whether to buy or sell an asset.
Volume is mainly used to identify momentum in a market’s price, with high and low volume signifying whether a trend is likely to continue or not. But it can also be used to identify times to trade to ensure best execution.
One of the most common uses of volume is confirming reversals. If you were looking to see whether a support barrier has been met and the price will reverse, you’d look for high buying volume and if you were looking to confirm a break in the level of support, you’d be looking for low volume from buyers. Conversely, if you wanted to confirm a reversal on a resistance level, you’d look for high selling volume and if you wanted to confirm a break in the level of resistance, you’d look for low selling volume.
What does volume mean in stocks?
Volume in stocks means the total number of shares traded on a specific stock exchange during a given timeframe. If a stock has a high volume, it's more likely to be a long-term move, whereas a stock with a low volume is more likely to experience short-term moves.
How to calculate volume in stocks
Calculating volume in stocks is the total amount of shares traded for the day, which includes both buy and sell orders. It’s pretty easy to find stock volumes, as all transactions are publicly available in the order book of an exchange.
Want to learn more about share trading? Find out how you can get started here.
What does volume trading mean in forex?
Volume trading in forex means something slightly different to securities volume. In FX trading, it’s the number of lots traded in a currency pair within a specified time period – put simply, it’s the amount of currency that changes hands from sellers to buyers.
How to calculate volume in forex trading
Calculating volume in forex is more difficult because it’s a decentralised over-the-counter market. This means that there’s no official record of trades, but rather partial volume figures have to be taken as a proxy for the overall numbers – these figures can either come from a specific market maker, broker or liquidity aggregators.
Want to learn more about forex trading? Find out how you can get started here.
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