Part of

 
AN INTRODUCTION TO DAY TRADING 

Volume Analysis in Day Trading

Use volume trends to improve your results

BY 
CORY MITCHELL
 
REVIEWED BY 
GORDON SCOTT

 
Updated July 21, 2020

In trading, the term volume represents the number of units that change hands for
stocks or futures contracts over a specific time period. Traders rely on it as a key
metric because it lets them know the liquidity level of an asset, and how easily they
can get into or out of a position close to the current price, which can be a moving
target.1

Volume analysis is a technique used to determine the trades you will make by
discovering the relationships between volume and prices. The two key concepts
behind volume analysis are buying volume and selling volume.

Buying Volume
When trading volume is higher, you'll have an easier time buying and selling large or
small quantities of stock, because other traders are in the market, waiting to fulfill the
other side of your trade.

Each transaction must have a buyer and a seller. To buy a stock, for example, a
seller must sell to you, and for you to sell, a buyer must buy from you.

This leads to some confusion because you'll often hear phrases like:

 The sellers are in control

  Buying volume is outstripping selling volume
 It's a heavy buy volume day

Buyers have control when the price gets pushed higher. Buy volume occurs at the
offer price, and represents the lowest advertised price at which sellers will part with
their shares. When someone buys shares at the current offer price, it shows that
someone desires the stock and is included in the buying volume metric.2

Selling Volume
Sellers have more control when the price gets pushed lower. Sell volume occurs at
the bid price. The bid represents the highest advertised price buyers will offer. If
someone wants to sell at the bid price, it shows that the seller doesn't desire the
stock (this demonstrates an example of selling volume).3

Volume typically shows along the bottom of a stock price chart. Charts depict trading
volume in vertical bars, with the bar showing how many shares changed hands over
a particular time period.

The image below is a trading example of a 1-minute chart, where each volume bar
along the bottom shows how many shares were traded in each one minute period.
The volume bars on a daily chart show how many shares change hands during the
course of each day.

FreeStockCharts.com

Volume bars may be colored. A red volume bar means the price declined during that
period and the market considers the volume during that period as selling volume
(estimated). If the volume has a green bar, then the price rose during that period and
it is considered by the market as buying volume (estimated).

Relative Volume
Traders prefer day trading stock with volume as it allows you to get into and out of a
position quickly, with large or small positions.

The average volume statistic shows how many shares change hands in investments

on a normal day. Some days will have a much higher volume than normal, while
other days see a lower volume.

Day traders tend to gravitate toward stocks or exchange-traded funds (ETFs) with a
high average volume, and/or stocks or ETFs that have had a higher-than-usual
volume on a particular day. Lower-than-average volume shows lower interest in the
stock on that day and likely smaller price movements.4

Higher Volume
Pay attention to days that have higher-than-usual volume. Such days usually have
volatility and large price moves either up or down. If most of the volume takes place
at the bid price, then the price will move lower and the increased volume shows that
sellers are motivated to get rid of the stock.

If most of the volume has taken place at the ask price, then the stock price will move
higher (due to demand and price availability). The increased volume shows buyers
believe the stock is moving, and want to purchase the stock.

Increased volume typically shows that something has happened with the stock.
Typically, a news release or active traders that have become worried or euphoric
about the stock's potential suddenly influence volume trading.

Analyzing Stock Price Movements

While not necessary, monitoring a stock's trading volume can aid in analyzing stock
price movements. You may find the following guidelines and descriptions helpful for
understanding and analyzing volume.

An increasing volume shows the conviction of buyers and sellers in either pushing
the price up or down, respectively. For example, if the stock trend heads up and
volume increases as the price moves higher, it shows buyers have an eagerness to
buy; this typically happens with larger moves to the upside (positive returns).

A trend can persist on declining volume for long periods of time, but typically
declining volume as the price trends indicates the trend is weakening. For example,
if the trend heads up but volume steadily declines, it shows fewer people want to buy
and keep pushing the price up. That said, the trend won't change until more large-
scale selling volume than buying volume takes place.5

Pullbacks
Volume should ideally be larger when the price moves in the trending direction, and
lower when moving against the trend, called pullbacks. This shows strong movement
in the trend direction and weak pullbacks, making the trend more likely to continue.

High volume accompanied by sharp price movements against the trend signifies the
trend is weakening, and/or is susceptible to a reversal.5

An extreme volume spike is where volume trends up more than normal (five to 10
times or more than average volume) for that time or period could indicate the end of
a trend. These are termed exhaustion moves—when enough shares change hands
that no one remains to keep pushing the price in the trending direction, it will often
quickly reverse.6

The Final Word

Volume can offer useful information when day trading. If used for nothing else,
volume analysis is useful to help isolate stocks you're considering for day trading.
Ideally, your day trading stocks should have more average volume so you can enter
and exit easily.5

This helps control risk as you can reduce losses where you want with minimal
price slippage. It also makes collecting your profits easier because many other
traders will want to take your position (buy from you when you sell) when you are
satisfied with your profits.

Volume can also be used to analyze the trend of a stock, helping to assess the
likelihood that a trend will continue. Volume analysis isn't perfect and it offers only
supplemental information, so you don't need to feel pressured to start analyzing
volume to day trade successfully.

Trading decisions should be based on price movements first and foremost, as price
movements determine profits and losses. Formulate your stock day trading strategy
based on price movements, and then add in volume analysis to see if it improves
your performance.