Volume

What Is Volume?

Volume represents the quantity of an asset or security traded during a specific time frame, often within a day. For example, the trading volume of a stock refers to the total shares exchanged between the daily opening and closing. Trading volume and its variations over time are crucial factors for technical traders to consider.

KEY TAKEAWAYS

• Volume refers to the amount of a security's shares traded within a specific time frame.

• Typically, securities with higher daily volume are more liquid, as they are considered "active."

• In technical analysis, volume serves as a vital indicator for gauging the importance of a market shift.

• A market move accompanied by high volume is deemed more significant, while a move with low volume is considered less significant.

Understanding Volume

Each time a buyer and seller complete a transaction involving a security, it adds to the security's total volume count. A transaction happens when a buyer agrees to buy what a seller offers at a specific price. If there are five transactions in a day, the day's volume is five.

Market exchanges keep track of trading volumes and offer volume data either for free or through a subscription. Trade volumes are reported as estimates, sometimes hourly, throughout the trading day. The end-of-day trade volume is also an estimate, with final figures available the next day. Investors can track a security's tick volume, or the number of price changes, as a substitute for trade volume since prices tend to change more often with higher trade volumes.

Volume gives information about market activity and liquidity. A higher trade volume for a particular security indicates better liquidity, improved order execution, and a more active market for connecting buyers and sellers. When investors are uncertain about the stock market's direction, futures trading volume usually increases, leading to more active trading in options and futures for specific securities. Volume tends to be higher near the market's opening and closing times and on Mondays and Fridays, while it's usually lower during lunchtime and before holidays.

Volume in Technical Analysis

Technical analysis is a strategy some investors use to make decisions about when to buy a stock, focusing primarily on stock price. The main goal of technical analysts is to identify entry and exit price points, and volume levels are crucial for determining the best ones.

Volume serves as a key indicator in technical analysis, as it helps measure the significance of market movements. A large price move during a specific period is seen as more credible or met with skepticism based on the volume during that period. High volume during a price move indicates greater significance, while low volume suggests less importance.

For traders and technical analysts, volume is a vital measure of a security's strength. High volume at a particular price point signifies increased buyer and seller activity. Analysts use bar charts to quickly assess volume levels and identify trends. Higher-than-average bars on a bar chart indicate high volume or strength at a specific market price. By studying bar charts, analysts can use volume to confirm price movements, considering moves with increased volume to be strong.

To confirm a reversal at a support level or floor, traders look for high buying volume. For a break in the support level, they seek low buyer volume. To confirm a reversal at a resistance level or ceiling, traders look for high selling volume. For a break in the resistance level, they search for high buyer volume.

Other Considerations

In recent years, high-frequency traders (HFT) and index funds have significantly contributed to trading volume statistics in U.S. markets. A 2017 JPMorgan analysis revealed that passive investors, such as ETFs and quantitative investment accounts that employ high-frequency algorithmic trading, accounted for approximately 60 percent of total trading volumes. In contrast, "fundamental discretionary traders," who assess the fundamental factors impacting a stock before investing, made up only 10 percent of the overall figures.