Three Must Know Essentials for Trading Volume
Trading volume represents the total amount of trades (being bought and sold) in a trading time period. Trading volume can be used as an indicator to help investors and traders identify momentum in a stock, asset or security and confirm trends. If trading volume is increasing, prices will generally move in the same direction. That is, if the stock, asset or security is continuing higher in an uptrend, the volume of the security should also increase right along with it! It would be the same for a stock gaining volume to the downside, just opposite.
#1 low volume = less traders
If a stock moves on low volume, it means that few people are trading the price movement. This often means that the trend has a lower chance of continuing. It’s important to remember that low volume means there are fewer shares trading, and fewer shares means less liquidity! Stock price volatility will rise in a low volume market.Â
#2 high volume - more traders
If a stock moves on high volume, it means that a lot of people are trading the price movement. The trend has a better chance of continuing and it will be easier to find someone to sell to and someone to buy from. Remember this about high volume: If there’s higher volume of trading in a certain stock, it means that investors and traders are interested in buying or selling it.
#3 spike in volume - trend may be changing
If a trend has already been established for some time and there is a noticeable spike in volume, it may be an indication that the trend is changing, or about to change. Remember this about volume spikes: A volume spike is a sudden large increase in volume. Spikes illustrate that traders are moving their money into or out of a stock, security or asset. This makes it likely that the existing trend is about to reverse direction.
Final thoughts on trading volume
Trading volume is vital and necessary to understand as a trader. All traders and investors can gain valuable insight from monitoring the number of trades being made on the market and or particular stock. Work on focusing on volume, just like you would focus on the price action of a stock.
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