What Does Volume Mean in Stocks Trading?

  • February 5, 2018

Raise your hand if you want to understand what does volume mean in stocks! Watch our video below to learn its importance when day trading. It's often overlooked by novice traders and it really shouldn't be - it's more important than ever in 2020. What are the volume charts telling us? Read on to get the scoop. 

What Does Volume Mean in Stocks When Trading?

  • So what does volume mean in stocks when trading? Whenever traders around the world buy and sell shares of a stock, this creates volume. Volume is important on all time frames such as the daily, 5 min, 1 min, weekly, and monthly charts. The higher the volume the higher the liquidity.

Why do pro traders pay attention to how volume affects stocks? All stock trading indicators use either volume and price action or a combination of this data. Needless to say, stock volume is incredibly important when trading.

The video above will give you an overview on how important stock volume is and show you how to locate it on stock charts. Read below for some tips. 

1. Volume Indicator in Stocks

In this post we are going to answer the question, what does volume mean in stocks? Understanding what stock market volume means will help you become better informed about when to purchase a stock as well as when to wait for the right time to get in.

Volume is an important indicator as it confirms the strength of a trend. Many traders use volume daily in timing their day trading entries and exits. Also they watch it for swing trades.

When volume is used as confirmation of a trade, it becomes a helpful tool. Studies you might use to monitor volume are called Volume profile, Volume by price, and On balance Volume, to name a few good ones.

What Does High Volume Mean in Stocks?

  • Investopedia defines volume as the number of shares or contracts traded in a security or an entire market during a given period of time. Simply put volume is the number of shares traded that day.  As a result, the higher the volume on a stock the more it will move.
What Does Volume Mean in Stocks

Observe the daily chart of $MSFT - note the volume which is just below the candlestick chart. This can be done in ThinkOrSwim by going to Chart Settings > General > check "Overlap Volume"

1. Supply and Demand with Stock Volume

Do you find yourself asking what does volume mean in the stock market? The more excitement there is about a stock the more people will want to buy it.

The price of a stock is determined by Supply and demand. Sellers provide supply, and when there is an imbalance in the market where there is more supply than demand - which is provided by buyers - price will move down.  Conversely, if there is greater demand for a stock than supply, price will move up. A news catalyst or other event can drive volume bars higher - good news will increase demand, driving up prices, while bad news will increase supply, pushing price down. Bookmark our day trade watch list and swing trade watch list pages.

So what does volume mean in stocks? Volume gives the investor a good idea of price action. Is there substance behind a stock price move?

Sometimes low volume shows that the strength of the move isn't very powerful. Maybe its just shorts covering? Maybe there are no real buyers or sellers. If a stock has moved up considerably, bulls may begin to get exhausted - they have already bought their full position. Volume will start to peter out, and this is when a trader will start watching for a reversal pattern. Check out our course on reversal patterns here.

Volume can be used to find the momentum of a stock. In fact, it also affects support and resistance. If a stock you’re watching is at resistance and volume is coming in and it breaks resistance and holds, price has a high probability of continuing to climb.

2. Stock Volume and Time of Day

If you have an average volume stock, it might not rip but rather be a slow grind up or down. A slow grind may be what you want - especially if you're swing trading. That's perfectly fine!

A stock in the SP500 vs an OTC pink sheet stock is going be much different in terms of volatility, due to lower volume in OTC stocks. For every buyer there needs to be a seller and vice versa. If volume is generally low in a given stock, sudden spikes in demand or supply can cause very rapid changes in price.

If you enter a limit order and set a specific price to sell shares of a stock and your order isn't getting filled, it means that no one wants to buy your shares at that price. So you may have to look at the level 2 and figure out what price the buys and sells are at, and move your order price OR set a market order. Learn more about level 2 trading here!

Certain times of day the action may be different when trading stocks. You’ll notice there are certain times of the day where volume picks up because buyers or sellers come in.

From the time the bell rings at 9:30am EST until about 11am the volume is typically pretty strong, but then it usually drops off as traders go to lunch. The end of day, between 3 and 4 pm - especially the final 30 minutes of regular market hours - will often have a lot of volume as institutions often trade during this time to rebalance their positions.

Traders in the market call this end of the day uptick in volume "power hour" because with great volume comes great potential for powerful moves in stocks, which gives investors and traders a chance to take a position and capture some gains.

3. High Volume = Party Time For Day Traders

What does high volume mean in stocks? High volume, especially in day trading, is really important. When day trading the ideal would be low float/high volume.

Low float means there are not a lot of shares available in the market. So, a stock that has a low float but high volume would be very volatile. The more volatility you have, the more chance you have to make a quick profit.

But pay attention! Volatility can work against you as well. You might be buying a stock when the selling volume is increasing. This is not smart if you're a bull - this sets you up to buy high and sell low!

Pay attention to those volume bars! If you want straight up stock alerts come check out our community. Also, take our free online trading courses.

4. Volume and Technical Analysis

When it comes to technical analysis, what does volume mean in stocks? Volume is one of the most simple technical indicators out there. All it’s showing is the number of shares being traded.

Have you ever been in a stock when it’s moving and then all the sudden it seems to just stop and take it’s time? If you look at the volume at that moment it’s highly probable that the volume is going to be extremely low, at least relative to when price was rapidly moving.

You're going to want to try several different technical indicators in addition to volume. Volume is especially important when penny stock trading.

What Does Volume Mean in Stocks

Here is one of my Ichimoku Cloud study setups. I use the Ichimoku cloud indicator along with the 50 SMA, 200 SMA, VWAP, RSI and VOLUME indicators for technical analysis of stocks.

Technical indicators are all important. They show us the trends, support and resistance lines and the patterns of a stock. They give us the information needed to make the best decision when trading. Volume is one simple and fundamental indicator that you can use.

If you see a spike in volume, you’re going to see a fluctuation in price. Add that to the rest of the indicators like moving averages, Ichimoku, MACD and RSI and you are more than prepared.

If you need more information on technical analysis the read our technical analysis basics post. Also you can always come join us in our trade room for our daily live streams. Our experienced traders will show you how to use volume, on balance volume and trend lines to make entries and exits on trades.

5. What Does Volume Mean for Stocks? up or Down?!

Sometimes when you think of high volume in the stock market, you think the price will be shooting up. That isn’t always the case. Sometimes a spike in volume occurs and the price drops.

This means that people are selling. News is often a catalyst for big moves in a stock - good or bad. If there’s good news on a stock volume will come in and drive a price up. The same is true with bad news. Volume will come in a drive the price down. Take our day trading course to learn how to profit from these quick changes in price.

Volume In SPY Monthly Chart Reviewed

Here we SPY volume on the monthly chart. Notice the high volume during the 08/09 bear market and recession?

There’s nothing worse than staring at a stock all day with no volume. The price action barely moves. These are the kind of stocks I want to avoid.

If you take a trade on something with low volume...you're stuck sometimes for hours or days, and won't capture much profit, or maybe lose money.

That’s why high volume is so important. There are certain days and times that have barely any volume and you’ll notice that the markets are barely moving.

If you need help finding volume ThinkOrSwim is a favorite platform we use to read charts. Take our ThinkOrSwim course.

6. Liquidity: What Does Volume Mean in Stocks?

Volume in stocks is very important and should not be overlooked. Having the right volume offers liquidity. Liquidity means opportunity. The more liquidity in a  market, the easier it is to trade.

Volume drives price. It may be a simple concept but it is a powerful one that every trader or investor needs to wrap their head around.

Liquidity also means that you can sell your position quickly if it turns against you. Low volume means there aren't many buyers and sellers in market. This can translate into difficulty exiting a position, exacerbating a bad trade. Volume is key to MANY aspects of trading!

Check out our video on stock volume here to get a better picture of volume and how it affects stocks. If you’d like to learn more about trading be sure to take our courses on our website and join our community, trade rooms and subscribe to our watch lists and watch list videos showing you how we find support and resistance levels to find stocks to trade.

I sincerely hope we answered your questions of what does volume mean in stocks and that you'll take a look at some volume studies and add it to your trading analysis routines. Happy trading!

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