● What is Stock Trading Volume?
Stock trading volume is the number of units that change hands of any given stock for any given time period. On a daily stock chart, each volume bar represents the number of shares traded each day. On a weekly chart every volume bar represents the number of shares traded each week.
Below is a daily chart of Icos Corporation (ICOS).
Fig 3.5 Click to Enlarge.
On the bottom of the chart is the stock trading volume. Each bar represents the number of shares traded each day. Green bars happen on up days and red bars happen on down days.
● How to Read Stock Trading Volume
There’s a saying that goes, “volume precedes price.” Essentially that means significant volume activity can predict price movement. It’s up to you to decide how true that is. At any rate, what constitutes a significant volume activity?
A good place to start is the average volume. Once you figure out a stock’s average volume, you can tell if a given day’s volume is significantly above or below that average.
Certain chart programs will tell you the average volume, but many don’t. If you want to know the average volume, simply go to (http://finance.yahoo.com), type in the ticker of the stock you want, and then look under “Avg Vol.”
● Volume Spikes
A volume spike is a volume bar significantly larger than average. A huge up volume bar can precede an upward move, and a huge down bar can precede a large downward move.
Fig 3.6
Above is another chart of Icos Corp. Its average stock trading volume at that particular time was 1.65 million shares per day. As you can see, around February 10th, there was a huge down volume spike of over 5 million shares. The large volume of sellers preceded a rather large move to the downside.
Volume can act like a strength gauge. If a stock or future moves, check the volume. If the move happened under large volume, then the move probably has plenty of steam behind it. If the move happened under low volume, the move may not be significant. |
