How to Use Stock Volume When Trading

  • January 8, 2019

Watch our video on stock volume and how it affects trading.

What Does Stock Volume Mean When Trading?

  • Having stock volume is an incredibly important aspect of stock market trading. Stock market volume helps make the trading world go round. Understanding stock volume helps you make better trades. The market is a battle of buyers and sellers. At times those buyers and sellers focus more on certain stocks and/or sectors than others. As a result, certain stocks are better to trade than others.

What is stock market volume? Investopedia defines volume as the number of shares or contracts traded in a security or an entire market during a given period of time.

In other words, stock volume is the amount of shares traded in a specific day. Have you ever tried to trade a stock without volume? It's like watching paint dry. 

Have you ever heard the expression "a watched pot never boils"? That's trading without volume. Stock market volume has many different outcomes on trading.

It isn't just about making a stock's price rise. There's more to volume than that. Although having volume increase or even decrease the price of a stock is helpful.

Price action is a major part of trading the stock market.

Stock Volume

1. Momentum

Momentum is necessary to trading because momentum drives stocks. In essence, momentum is there because of volume.

The more excitement there is, the more price moves. The more price moves, the more people want to trade that particular stock. In fact, volume coming in will have stocks hitting scanners like Trade Ideas.

As a result, people see those stocks hitting the scanners and check them out. If they like what they see, they'll take a trade. 

That, in turn, sends price higher. Stock market trading is a give and take relationship. For every buyer there is a seller.

Depending on your trading style, you can use use volume differently. A bearish style of trading likes the momentum heading downwards. Whereas the bullish trader likes when volume is sending momentum up. We share our Trade Ideas stock scanners live in our trading service.

2. Technical Analysis: Stock Volume

Volume is the most simple form of technical analysis. In essence, volume is just the number of shares traded for the day.

However, even this simple indicator can have a profound effect on the market and/or stock. In fact, one technical indicator used to track volume is the On Balance Volume or OBV.

Sometimes volume comes in without price changing. The OBV is used to monitor that phenomenon. Using other technical indicators is smart because you want confirmation of a move.

Since there are different float levels in stocks, volume affects them differently. With that in mind, it's important to get confirmation of a potential move. That way you're not trapped.

3. Support and Resistance

Support and resistance are the two most important levels to pay attention to in trading.Volume can and does play a large part in trading support and resistance.

If a stock hits resistance, many times it ends up falling back down to support. However, volume can come in and when stock reaches resistance, pushes it through and makes a new support level.

The opposite is also true. If resistance can't be broken and price falls, it'll test support. If support holds, the stock tends to move back up in price.

However, if support is broken because bearish volume comes in and pushes price down, a new resistance level is formed.

Trading is basically continuously forming new levels of support and resistance. Which is also why it's incredibly important to be able to map out those levels.

You can use support and resistance as entries, exits and profit targets. A spike in volume usually means a fluctuation in price. With your levels mapped out, you get a better picture of the trade potential.

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Stock Volume

How Stock Volume Affects the Float

  • What is a float? It is the number of shares available to trade. Float and volume may sound the same but they're different. Not all shares available are traded.There are high, medium and low float stocks. As a result, volume affects each type of float differently. A high float stock means that there are a lot of shares available.

When volume comes into a high float stock, it may not take off in price. Usually it tends to rise or fall slowly. That means that hotkey traders typically stay away from the high float stocks. They don't want to grind it out. They'd rather get in and out quickly. 

Medium float stocks have less shares than high floaters but volume coming in usually means a grind is happening. These are actually pretty great stocks to day trade.

These stocks are usually the ones that grind up, making for a nice profit potential but aren't being paid attention to because they're not hitting the scanners.

It may take an hour or two but while everyone is looking at Trade Ideas, a medium float stock grinds up for a nice profit. For example, it could be 50 cents or a dollar.

Low float stocks have a small amount of shares available. As a result, they're pretty volatile when volume hits. That volatility can be risky. However, the low floaters are the stocks most day traders pay attention to and the stocks hitting the scanners. If you need more stock training then make sure to take our free courses.

1. Bullish and Bearish Volume

Typically when we think of stock volume, it tends to be in a bullish sense. Volume comes in and price moves up right? Yes that happens but bearish volume occurs also.

The market trades in cycles. As a result, you may have a lot of volume but the price of stocks are falling. That means the bears are in control or buyers are taking their profits.

Hence the importance of learning the different strategies to use for bullish and bearish volume. Take our day trading course to learn how to short stocks.

Short selling allows you to profit off of bearish volume. The goal of trading is to use to tools provided to you to make money. You won't make winning trades 100% of the time however. 

2. Liquidity: Stock Market Volume 

Learning to cut your losses quickly as well as take your profits is going to make you a more successful trader for a long time.

Stock volume provides liquidity. The more liquid a stock is the easier it is to trade. It's that simple.

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