Guest post from Skylar Hammond.
When trading, you are always on the lookout for changing prices in a stock. One of the aspects that can affect this, is the volume of a stock. If you are unsure about how the two are connected, or even what volume means in this case, keep reading to find out.
What is a Stock’s Volume?
The volume of a stock is the number of shares that are bought and sold during a specified period. Every purchase and sale adds to the overall volume of the share.
For example, if you completed 10 trades, both buying and selling 100 shares, you would have increased the volume by 2,000 shares. This is because you bought and sold for a total of 20 times. 20 times 100 is 2,000.
Why is Volume Important?
The volume of a share can communicate information to traders, as it represents the activity of the stock during that period- making it crucial for those who day trading stocks to know about.
For example, you might notice that the price of a stock changes when the volume rises. If it continues, then you can determine that that is the direction of the pattern.
How Volume Changes the Stock’s Price
When the trading volume is high, that is when you will have the easiest time buying and selling your stock- there is a demand for it that the volume shows.
Day traders make most of their trades when their stock has a higher than average volume for that period. When there is a lower volume, it indicates that trades are less interested in that stock, meaning the price changes are going to be unnoticeable.
Why Pay Attention to High Volume?
High volume days have the potential to become more volatile- the price of the stock moves up and down quickly, in larger amounts. Lower prices with high volume show that traders want to get rid of their stock.
Plus, an increased volume indicates that something happened, maybe in the news, that caused traders to react to the stock. This can cause an increase or drop in price, depending on if the traders suddenly started to buy or sell their stock.
How Volume Helps
Being aware of a stock’s trading volume helps watch for a good deal, as it can show the stock price changing. Rising volumes can also show how either the buyers or sellers are attempting to change the price of a stock.
Watching volume will also help you determine other trends. For example, an upwards trend with a declining volume shows that traders are not buying the stock, but are instead raising the price. You can expect the trend to stay the same, at least until more people become interested in the stock again- which is shown when the volume starts to go up.
They Indicate Reversals
Volume patterns can also let you know when a reversal is approaching for that stock. A sudden spike in volume shows the end of the trend you were following, since the shares are running out and the traders lost interest in moving the price in a certain direction.
When this happens, the stock will usually hit a reversal.
In short, a stock’s price is greatly affected by the volume. Knowing what the volume trends mean can also give you insight into what to expect from fluctuations in price.
When you become familiar with volume, you can better decide when it is best to buy or sell a stock during a specific period- a skill that is crucial for any day trader to know.
Skylar Hammond is a writer for True Trader who specializes in topics such as stock trading, personal finance, and forex. He focuses on helping beginners and experts alike learn more about the market and improve their trading skills.