Trading Stocks? Keep an Eye on Volume
Courtesy of Skylar Hammond, True Trader
Successful stock trading requires paying attention to a key metric — volume.
Volume (the total number of shares bought and sold during a specific trading session) indicates a stock's "health." While volume doesn’t directly affect price, it indicates trends and can influence the direction that shares move. Consequently, you can use a stock’s volume to increase your success in trading.
Volume’s Impact on Stocks
The stock market, like any other major market in the world, is affected by supply and demand. Generally, if there’s a high demand for a particular stock, the price for that stock moves higher. Alternatively, if there’s a low demand for a specific stock, the price for that stock moves lower, particularly if there is a lot of supply available.
However, stock price is more complicated than a simple supply and demand equation can predict. Other factors, such as the bid-ask spread, have an effect. High volume stocks usually have closer bid-ask spreads.
If you're trading stocks, you need to focus on stocks with high volume, and therefore good liquidity.
Keep an Eye on Volume
An increase in trading volume often indicates that a stock's price is going higher. However, there's no guarantee that a move higher will turn into a sustainable upward trend. If the volume has been increasing over time, it's a stronger indication that the stock will continue moving higher.
Volume Can Indicate When to Get Out
After a run, if a stock's price is staying steady or continuing to increase, while the volume is stagnating, that might serve as a sell signal. Decreasing volume is the first indication that it might be time to sell.
Volume Can Affect Your Success
Summary
Volume impacts liquidity and the ability to actively trade a stock. It often precedes rising or falling prices.
Whether you’re day trading, swing trading, or long-term investing, it's important to track a stock's volume. It can dramatically impact how successful your trading will be.
Skylar Hammond is a writer for True Trader which 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.
