When you are getting started in trading it is important to know how to identify and monitor how certain assets and trends are doing and how you can utilise these to ensure you are getting the returns you are after from your retail trading.
Volume can be very useful to a trader, especially as a tool to confirm trends and price changes. But what does volume mean?
Trading volume is the measure of how much a certain asset was traded in a set period of time. For stock, volume is measured by number of shares traded. Traders will look at volume patterns to find out key information about certain assets and volume is a key touchpoint in some technical indicators. Volume is thought by many in trading to be a great method to work out the reliability and strength of a price trend.
Buying vs. Selling Pressure
When certain stock is in high demand, buying pressure is increased and prices rise. Whereas, when demand for stock decreases, more traders are wishing to sell their stock as pressures to sell increase and prices drop.
Low Volume Stock
Stock with low volume tends to be more volatile in price when compared to those with higher volume and typically has a wider spread. When important news or other factors cause a sudden change in price, a stock with lower volume will usually see the price continuously alter, this is due to investors who own stock struggle to come to an agreement trading price.
High Volume Stock
The price of a stock with high volume is usually less changeable with a smaller spread. Again, factors or crucial news can cause a shift in price, yet higher volume stock will usually see a single price spike or drop, since investors who own the stock quickly come to an agreed new price that stock should trade at.
Volume Backed Trends
It is rare that volume is used to form a strategy on its own but rather as a tool to confirm whether a price change is worth considering. A sharp movement in the price of stock, backed up by a rise in volume can offer an idea that this price trend is likely to continue than similar trend in a stock with low or static volumes.
If you wish to learn more about volume as well as other trading concepts such as volatility and liquidity, don't hesitate to book onto our Online Trading Masterclass and get access to all the important and crucial knowledge of retail trading.
