What Does Volume Mean in Stocks

What Does High Volume Mean in Stocks?

What does volume mean in stocks when trading? This indicator shows a stock’s liquidity and is important to get in and out of a trade. The more people that trade stock, the easier it is to get in and out of a trade. Pay attention when you see large volume spikes on charts, no matter the time frame. Huge volume may sometimes solidify the breakout and continuation of a stock. Sometimes, there are false breakouts, but volume usually helps confirm sentiment. 

Understanding what stock market volume means will help you better understand when to purchase stock and 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 daily volume to time their day trading entries and exits. Also, they watch it for swing trades.

Whenever traders around the world buy and sell shares of a stock, this creates volume. Volume is important in 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 these data. Therefore, stock volume is incredibly important when trading.

When volume is used to confirm 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.

Supply and Demand

The more excitement about a stock, the more people 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 buyers provide- the price will decrease. Conversely, if there is greater demand for a stock than supply, the 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 prices down. 

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

Sometimes, low volume shows that the movement’s strength isn’t very powerful. Maybe it’s just shorted covering? Maybe there are no real buyers or sellers. If a stock has moved considerably, bulls may begin to get exhausted – they have already bought their full position. The volume will peter out when a trader watches for a reversal pattern. 

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

Example: What Does Volume in Stocks?

SNAP Stock Volume

$SNAP daily chart volume highlighted. Note big reversals or breakouts were accompanied by high volume.

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 will 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 the volume is generally low in a given stock, sudden spikes in demand or supply can cause very rapid price changes.

If you enter a limit order and set a specific price to sell shares of a stock and your order isn’t filling, no one wants to buy your shares at that price. So you may have to look at level 2, determine what price the buys and sells are at, and move your order price OR set a market order.

At certain times of day, the action may be different when trading stocks. For example, you’ll notice certain times of the day when volume picks up because buyers or sellers come in.

The volume is typically pretty strong when the bell rings at 9:30 am EST until about 11 am, but it usually drops off as traders go to lunch. The end of the day, between 3 and 4 pm – especially the final 30 minutes of regular market hours – will often have a lot of volumes 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.

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High Volume Stocks Meaning

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 with a low float but a high volume would be very volatile. The more volatility you have, the more chance you have to profit quickly.

But pay attention! Volatility can work against you as well. For example, you might buy a stock when the sales volume increases. This is not smart if you’re a bull – this sets you up to buy high and sell low! So pay attention to those volume bars! 

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 shows is the number of shares being traded.

Have you ever been in a stock when it’s moving, and then suddenly, it seems to stop and take its time? If you look at the volume at that moment, the volume will probably be extremely low, at least relative to when the price was rapidly moving.

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

Technical indicators are all important. They show us the trends, support and resistance lines, and stock patterns. 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 will see a price fluctuation. Add that to the other indicators, like moving averages, Ichimoku, MACD, and RSI, and you are more than prepared.

What Does Volume Mean in Stocks?

This is the most common way I use the VWAP indicator. VWAP is dashed green, and upper and lower VWAP is displayed. I look at these levels as overbought and oversold and watch for entries at VWAP and profit-taking from overbought or oversold levels. Volume helps confirm my trades on whether I enter, exit, or stay out of a trade.

Up or Down?

Sometimes, when you think of high volume in the stock market, you think the price will shoot 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 stock – good or bad. If there’s good news on a stock, the volume will increase and drive a price. The same is true with bad news. The volume will come in and drive the price down. 

There’s nothing worse than staring at a stock all day with no volume. As a result, 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. But, of course, certain days and times have barely any volume, and you’ll notice that the markets are barely moving.

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

Frequently Asked Questions

High volume in stocks means that there is liquidity. It's important to have a lot of volume moving in and out of a security because it makes it easier to enter and exit a position as well as makes the bid/ask spread tighter.

Good volume for a stock is over 1 million shares traded within a trading day. Ideally, you want several million or more. The more volume, the more liquidity. Usually, large-cap stocks have many more shares traded daily, many times 20 million plus.

It's good to buy stocks with high volume, not low volume. The higher the volume, the better the fill and easier it is to enter and exit a trade. The low volume makes the bid/ask price too wide, creates bad fill prices,, and is harder to trade.

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