Stock volume is an important indicator that shows market sentiment towards a particular stock. It measures the total number of shares that were bought and sold during a specific time period, providing you with important information that could improve your trading decisions. 

Once you understand how to read stock volume, you will be able to track investment trends, spot possible reversals, and make smart inferences about the overall health of the market, making you a more confident trader. 

Key Takeaways

• Stock volume provides a snapshot of current market activity and price trends.
• Knowing how to read various indicators will help you understand trends in the overall stock market. 
• Avoid common pitfalls, such as overreacting to single-day volume spikes, by looking at long-term market trends.

What Is Stock Volume?

Stock volume is the total number of shares that are traded, usually within a single day. Stock volume is measured by counting the total number of shares that are transacted between buyers and sellers, also called absolute volume.1

Relative volume, on the other hand, compares the current trading volume against the stock’s average volume over a certain time period, such as 30 or 60 days.2

Why Stock Volume Matters in Trading

Stock volume is important because it tells you how interested people are in a particular stock. When a stock has a high trading volume, it indicates a strong interest as people are actively trading the stock. If a stock has a low trading volume, it indicates less public interest and slower investing activity.

Volume Moving Average 

The volume moving average (VMA) is a time-based indicator that assumes all trading days are equal, smoothing out volume data over a specific time period to help identify normal vs. abnormal trading activity. The VMA creates an average price that is constantly being updated. 

On-Balance Volume

On-balance volume (OBV) is a trading indicator of momentum that uses volume flow to predict how a stock’s price will change. OBV calculates this by adding a stock’s volume on up days and subtracting it on down days to indicate how strong a trend is.

Volume-Weighted Average Price

The volume-weighted average price (VWAP) is a foundational concept in trading that shows you the price action throughout a single day, giving you insight into the overall price trends. 

Confirming Breakouts and Breakdowns 

Take advantage of potential trading opportunities and avoid losses by knowing how to spot a breakout and a breakdown. When a stock moves past a defined price level, high volume indicates that the move is strong and will likely continue. This is known as a strong breakout.

Spotting Trend Reversals

If a stock’s price is rising but volume is going down, it could be a warning signal that the trend is losing strength and could reverse soon.  

Identifying Market Strength and Weakness

Look at trading volume over various time periods to see how strong a market move is. High volume over time indicates strong interest, while low volume could indicate a stock is losing steam. 

Timing Entries and Exits

Market timing is an important part of every trader’s strategy, and stock volume can help you decide when it’s a good time to buy or sell. The key is to enter a trade when volume supports the general trend and consider existing if volume suggests a change is coming. 

Common Mistakes Traders Make With Volume

There are some common mistakes that traders make when they first begin tracking stock volume. 

Misinterpreting a price change on low-volume stocks as significant, when the change is in fact not sustainable due to a lack of strong market interest. 

Ignoring other technical indicators outside of stock volume, like price patterns and moving averages, and basing your investment decisions solely on volume. This can lead you to have an incomplete picture of a stock’s performance. 

Overreacting to a single-day volume spike. A spike could be caused by a number of temporary factors rather than a reflection of a true shift in market sentiment, so look at the broader context and market activity before panicking. 

What Other Indicators Can Be Used With Volume?

Other indicators that can be used to track stock volume include the Chaikin Money Flow, Klinger Oscillator, Relative Strength Index (RSI), Bollinger Bands, and Moving Average Convergence Divergence (MACD). 

How Much Volume Is Good for Trading?

High-volume stocks trade at more than 500,000 shares per day, while low-volume stocks trade below this threshold, though there is no officially established cutoff.4

What Is the Formula for Trading Volume?

Trading volume equals the total number of shares traded during a specific time period. 

Is Low Trading Volume Bad?

Trading low volume is often seen as more risky due to low liquidity, but it can also have some benefits and result in profit if done strategically.

The Bottom Line

Stock volume is an important tool for understanding market activity and helping you make informed investing decisions. If you want to use stock volume effectively, learn how to spot trend reversals, strategically time your entries and exits, and use volume to confirm breakouts and breakdowns