Volume and its Meaning

Volume is one of the most basic and beneficial concepts to understand when trading stocks. Volume is defined as, “the number of shares or contracts traded in a security or an entire market during a given period of time.” What this means is that each time a person sells or buys shares of a stock, that is considered volume.

Tallying volume is done by the market exchanges and reported via every major financial website. To tally volume, simply add the traded shares for each order on the fly. For example:

  • Trader 1 Buys 100 shares of stock
  • Trader 2 Buy 500 shares of stock
  • Trader 3 Sells 1000 shares of stock

Total volume is then 1,600 shares for this sequence. Again volume increases regardless if it is a buy or sell order.

It is not uncommon for stocks to trade millions of shares per day. For example, the S&P 500 ETF (SPY) trades on average over 150 million shares per market session. This is literally Billions of dollars worth of stock changing hands every day the market is open. On the other hand, smaller company stocks, known as penny stocks, might trade only a few thousand shares in a given day.

Benefits of Tracking Volume

By understanding what volume is and how it is tracked, we can use this knowledge to help us make better informed trading decisions. There are two key benefits to tracking volume:

  1. Support and Resistance – Throw one pebble at a glass window and it may not crack or break, but throw 100 of different sizes and the chances of a break are far greater. Applying this to stocks, if one investor places an order to buy 100 shares of stock at the current Ask price, the stock may not move up. But, if 20 investors all place buy orders of different quantities, the stock is most likely going to move up in price because there are not enough sellers. Bottom line, to break through a key support or resistance level on a stock chart, volume is needed in quantity.
  2. Average Daily Volume – By knowing the total volume on a day, you can understand the power of influence on a given stock. The greater the volume, the greater the influence for the price to change. This allows us to identify accumulation and distribution days on a stock chart which can be used to identify current momentum and predict future price movements.

Learning to identify volume trends and count accumulation or distribution day strings on a stock chart does take practice. But, when applied correctly it is can give the investor a huge advantage in obtaining profits.

Further Reading:

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Comments

  1. Richard Emerson says

    Re: Volume and its Meaning

    Hi Blain,

    Do you know of any price/volume pattern studies? Like, what’s the volume pattern for a head & shoulders?

    thanks
    rich

  2. vaibhava says

    Hi There………

    thanks for your informative article…

    I have a small doubt on the stock volume…

    If somebody selling 100 shares of Google and I buy these 100 shares then the total volume on Google is increased by 200 shares? or 100 shares?

    Best Regards,
    Vaibhava

  3. says

    If you purchased the exact 100 shares that the somebody was selling, volume only increases by 100. But, if somebody sells 100 shares of Google and completes the order, than a few minutes later you go and buy 100 shares of Google, volume will increase by 100 again so 200 total since they are two separate transactions. Hope that makes sense.

  4. says

    Hi Pavitra,

    Are you asking in regards to interpreting volume? With or without strong volume, no investor truly knows a stock’s share price is going to increase (as that would be fortune telling to an extent). The way traders make money is by studying historical patterns and data and uses it to make an “educated guess” as to whether or not the stock price is going to go up.

    Hope that helps!

  5. denise says

    :?: i’m not sure i understand. so are you saying even if more people are selling their shares of a particular stock than it is people buying, that this is going to make the total daily volume go up and also cause the price of the stock to go up? what if people are selling because they are trying to get rid of it. so why would the price go up?

  6. says

    The price would most likely do down then. Your understanding is basically right on the money.

    The more people that buy the stock at the same time, the higher the price will go. For example, when a stock announces it is going to be bought for $100 a share when it is currently trading at $80 a share, do you have 5 days to grab shares at $80 before it shoots to $100? No way. Within 10 minutes the stock will be trading at $100 a share, why? Huge demand, limited supply, stock goes up in price.

  7. MeanReverting says

    Blain,

    I have no idea what you were trying to say in your article, simply because this simple supply-and-demand economic theory is too obvious to me and your points make no sense at all.

    “Power of influence”? Strong demand (more people biding on one stock, for the sake of simplicity here) most likely powers the price up. Volume does not necessarily indicate how strong the demand is, because volume is in past time and demand is a future force. For instance, one stock increases 50% during one trading day and volume is 10 times average, will you buy this stock at 9:30am the next day given your only reason is the huge volume? In theory, stocks follow a Brownian Motion, which basically means independent of what happened in the past.

    Volume is just a simple measurement of how active the market WAS. However, this “active” could be both good and bad under normal circumstances. If news is neutral, in one trading day, +5% and -5% on one stock price would most likely create the same volume.

    Again, volume measures what happened before and is weakly correlated to future stock price movements. High volume does not necessarily show strong investor confidence or market demand. It however indicates the degree of investor anticipation mixture in the past. Volume is resulted from trading which includes both buying and selling. When the stock price meets BOTH buyer and seller’s interest, that is where the trade happens and volume is created. Under an extreme situation, if everyone thinks the price will keep going up, there will be no seller, and therefore no volume will be created. It does not make sense and is irresponsible to say that high volume indicates a likely price increase.

    Back to the cookie thing, you and your friends will probably only ask for cookies if only you knew the cookies were “good”. If you knew the cookies were “bad”, less likely your friends would still ask for cookies with you. On the other side, if the moms want to get rid of some old cookies, she may just throw them to you without being asked at all. My point is, ultimately, the quality of the cookies drives the number of friends wanting to ask for them with you and whether or not the mom wants to give to you, not the other way around. Also, the number of friends asking for cookies is not “volume”. It shows the demand which is a future force. Apparently, comparing stock volume and this cookie thing is like comparing apple to orange. They all look round, but are totally two different things.

    Welcome to discuss!!

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