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Volume Trading

Getting a Better Understanding of Volume Trading

In the stock market, volume is defined as the total number of shares of a given stock that exchanges hands during a certain time period. Today, hundreds of thousands of share are exchanged between the buyers and sellers on a daily basis on major stock exchanges such as the Nasdaq National Market or the New York Stock Exchange. For some, volume is nothing, but just an interesting statistic. However, every investor should be aware of the fact that volume can prove to be an excellent tool for determining the direction of the price and for the evaluation of the strength of the market.


It was in the late 18th century and the early 19th century that serious recording of volume began to take place on stock exchanges. Nonetheless, it wasn’t until the 20th century that volume trading became a concept amongst market analysts who began to study the trends of volumes for clues that could be used for making sound and beneficial decisions in regard to their investment.


Volume is regarded as one of the most important statistics in the stock market, not just for individual stocks, but also for the entire stock market as a whole. Other than price, the best indicator for judging the strength of the market or a stock is volume at any given time. Investors can use volume for finding the best time for buying or selling a stock.


There are some primary features associated with volume trading in the stock market and the two prominent ones are the buyers and sellers. The total tally of the volume is changed each time shares are exchanged between the two parties. This data can be used for the calculation of numerous sophisticated volume analysis tools such as the On Balance Volume and Distribution/Accumulation Line. This can be useful for investors in determining whether money if flowing out of or into stocks and if recent price action is confirmed by volume.


Traders and investors have come up with a variety of ways for studying volume and then extrapolating buying and selling decisions in this way. One of the most common ways of volume trading is to see if recent price action is being confirmed by volume trends or are diverging negatively. Volume and price are in alignment when there is confirmation. On the other hand, when price and volume divulge, a reversal in the stock market price is expected.

Time Frame

In almost every time frame, volume can be handy for providing important cues. This includes multi-year investing and short-term intra-day trading. For instance, volume surges are often studied by traders to see if the stock price has reached a near-term low or high and has been punctuated by very strong volume.

High volume trading is profitable for traders because it can offer them greater liquidity. This means that investors have the option of buying and selling shares at exact market prices whereas investors are punished in low volume trading by having to a large ask/bid spread for exiting or entering a position.