Warrior Trading Blog

Understanding How Stock Volume Affects Price

Stock volume

As a trader, one of your goals is to capture the change in the price of a stock. To do this, you want to collect as much information about the shares, including how much of it is traded.

The volume of shares traded provides another dimension, that can help you measure the importance of the daily change in the price of a stock. Not only can you measure the raw volume of shares and indices, but you can also create indicators that can help you determine the momentum of volume.

What is Volume

Volume is the total number of shares that are sold and purchased during the trading session or a specific period. Remember the number of shares of a specific stock or ETF that are purchased must equal the number that is sold.

Each transaction that takes place during a session generates a volume count.  If you made 10 trades buying and selling 100 shares, the total you would have added to the volume is 2,000 shares.

Where you Find Stock Volume

The volume of shares can be found on the exchange where they are traded. Large exchanges such as the New York Stock Exchange the Nasdaq and the Chicago Board of Options Exchange provide public information about the volume per stock.

For example, the NYSE provides historical volume information. The Volume Summary contains a detailed breakdown of NYSE, NYSE American, NYSE Arca, NYSE National, and NYSE Chicago trading activity by share size, number of trades, and short sales.

Additionally, some private vendors offer historical volume information in graphical format as well as tabular format.

Stock volume

Why is Volume Important

Volume can describe pieces of information that cannot be relayed by price. Since trading volume is the number of shares traded during a given period it indicates the overall activity of a stock.

What is important to determine is whether the volume is average volume, low volume, or heavy volume relative to previous trading periods.

Several different scenarios can occur when prices are moving and volume can provide you with clues as to the next market move.

Here are some of those scenarios:

  • Prices rise on heavy volume
  • Prices fall on heavy volume
  • Prices rise on average volume
  • Prices fall on average volume
  • Prices rise in low volume
  • Prices fall on low volume
  • Prices remain unchanged on high volume
  • Prices remain unchanged on low volume

Each of these scenarios should be evaluated especially if you are planning on entering a trade or you are managing a position.

Generally, when prices rise or fall on heavy volume, it’s a telltale sign that prices are poised to move in the direction of the trend. This compares to movement when there is light-volume which might tell you that a few players are attempting to push a stock price in a specific direction.

When average volume occurs that the market does not provide any new information. When prices remain unchanged during heavy volume you know that price level is a battleground.

How Does Volume Compare to Liquidity?

As volume declines, and activity falls the ability to enter and exit a trade declines. Trade volume and liquidity are considered interrelated. When volume declines it indicates a low overall market interest in that particular security.

Additionally, when volume slides it reduces your ability to enter and exit a trade without slippage. Declining volume usually leads to a widening of the bid/offer spread of a stock, which reduces your ability to enter and exit at a minimal cost.

Types of Volume Studies

Volume when used along with price can help you determine the future direction of a stock. Several indicators incorporate volume as a trading indicator. One of the most popular is the Relative Volume ratio.

Relative Volume

Relative Volume helps measure investor interest in a stock. Generally, relative volume compares a stock’s current volume to its prior volume over a time horizon. The relative volume ratio is calculated by taking today’s volume and dividing by a prior day’s volume or the average of a few days.

If the ratio is above 1, it tells you that today’s volume is a multiple of the prior days’ volume. If the ratio is below 1, it tells you that today’s volume is only a fraction of the prior day’s volumes.

Advanced-Deline Volume

Another popular volume indicator is the Advance-Decline Volume Line. This study is a breadth indicator based on the difference between the volume of advancing stocks minus the volume of declining stocks.

Net Advancing Volume is positive when advancing volume exceeds declining volume. The Net Advancing Volume is negative when declining volume exceeds advancing volume. A trader might consider charting AD Volume Line for a specific index and compare it to the performance of that index.

There is also a study called the Advance-Decline Volume Percent which is a breadth indicator that measures the percentage of Net Advancing Volume.

Put/Call Ratio

A volume indicator that uses options volume is called the put/call ratio. The ratio is an indicator that shows put volume relative to call volume. Puts are generally used to hedge adverse changes to the price of a stock. Calls are used to mitigate the risk of advancing stocks. The put/call ratio is often used as a market sentiment indicator.

When the put/call ratio is above 1, put volume exceeds call volume which tells you more people are trading based on fear of an adverse change in the price.

When the put/call ratio is below one it tells you that more people are speculating on higher prices.

Bottom Line

Volume is an essential piece of information that can describe your activity and the momentum behind a price change. High levels of volume generally reflect stronger levels of liquidity. When volume declines substantially liquidity also falls.

You can formulate certain studies that will describe the momentum of volume and use that in conjunction with price to determine future price changes.

There are several free and many paid services that will show you historical volume information.


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