What is trading volume?
Trading volume, or volume in trading, is the number of completed trades in a single security or across a whole market in a given time period. For example, if shares in a security are traded 50 times in a day, the volume for the day is 50. But if a number of traders took positions in the security during the day and closed them out by the end of the session, the trading volume can be greater than the total of positions open at either the start or close of the day's trading.
Example of volume of trade
Imagine that a market is made up of two traders; Joe and Sarah. Joe buys 250 shares of stock ABC and sells 250 shares of stock XYZ. Sarah buys the 250 shares of XYZ and sells 500 shares of stock DEF to Joe. The total volume of trades is 750 (250 shares of XYZ and 500 shares of DEF).
Where have you heard about trading volume?
When a company is in the news, regardless of whether it’s for good or bad reasons, trade volume tends to go up. That's because traders are responding to the news by either buying or selling the company's shares.
What you need to know about trading volume
The volume of trade at the world's biggest stock exchanges is incredible. In the 30-minute period before the New York Stock Exchange (NYSE) closes for the day, it's common to see over 200-300 million trades. The total amount of trades made per day at the NYSE is in the billions.
Technical analysts use trading volume data to assess the strength of a price movement and whether it'll stay at its new level for very long. When the price of a stock goes up, technical analysts check if volume rose as well if it did, then these analysts consider the price movement more significant and more likely to stick. However, high trading volume can also indicate a price reversal.
How to use volume to improve your trading
When analysing volume there is a basic framework that traders can adhere to with respect to using volume to improve their trading. Traders can use volume to determine the weakness or strength of a move; the more volume the stronger the momentum. The idea us that traders should be more inclined to join stronger moves and avoid moves that weakness - or even look to enter in the opposite direction of a weak move.
A rising market should, in theory, see increasing volume. For the price of a security to keep rising, an increasing number of buyers are needed, which would increase volume. 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.
Key lessons learned
- Trading volume refers to the total number of shares that have been exchanged between buyers and sellers of a given asset during trading hours of a certain day.
- The volume of trade is used as a measure of liquidity and activity.