As a trader, it can be tough to find opportunities in the market if there isn’t a lot of trading volume that day. Even if you think you found a trading setup with a lot of potential, it won’t go anywhere without trading volume. A stock without volume is akin to a car without gasoline. It’s simply not going to get you to where you want to go without the “fuel” or trading volume it needs.
Trading volume is defined as the number of shares that are traded within a specific timeframe. It can give you valuable insight into how active the buyers and sellers are for a certain security. With trading volume, you can learn about things like the demand for a security, how quickly it might change price, and when a trend is reversing.
To find the volume of a security, simply pull up a quote. Every stock quote typically provides the daily volume as well as the average 10-day volume. As a trader, understanding why volume is important and how price action looks before entering a trade is vital to your success. That’s why we’ve put together the following article on why volume matters in day trading so that you can learn how to use volume to your advantage.
Volume Provides Liquidity
Liquidity essentially refers to how easy it is to buy and sell a security. If you are trying to make money in the market with a day trading strategy, you need to find a security that allows you to get in and get out of the trade quickly. Most day traders look to capitalize on quick intraday price movements of a stock or security. If you are trading something without a lot of volume, the liquidity of the security will be lower. That means low volume stocks and securities are harder to get into and out of trades with. It’s much easier to get caught in a pump and dump scheme if you are trading securities with low liquidity. The bottom line is that if you are trading during high volume periods, you will be able to get into and out of trading positions with ease. On the other hand, low volume securities make it much more difficult to get in and out of trades due to lower liquidity.
Volume is a Great Trading Indicator
Whenever you start learning about trading for the first time, it’s easy to get overwhelmed at the sheer amount of information that is available to you. Trading indicators are the perfect example of a concept that can be a lot for new traders to digest. It’s usually best to keep things simple when you first try to grasp using trading indicators. Volume is the perfect place to start with indicators. Many traders use volume as a trading indicator because it’s a good sign that the price is going to move. For example, a spike in volume during a falling market might mean that investors are closing their positions out at a rapid rate. On the other hand, high volume during an uptrend is usually an indication of high demand for a security. Volume spikes, or daily volume that is higher than usual, can definitely be a great way to gauge the market’s opinion on a particular security.
Volume Improves Bid-Ask Spreads
As traders, it can be extremely frustrating to find a trade setup that you want to take only to realize that the bid-ask spread for the security is wide. After all, why would you want to buy a stock that is instantly worth less than what you just paid? That’s another reason why volume is a day trader’s friend. High volume stocks tend to have a tighter bid-ask spread, usually about a couple of pennies. This is a huge plus for traders that are looking to get into and out of a trade quickly. Profitable trading is already a challenge, and you are putting yourself at an immediate disadvantage by entering a trade for a low-volume stock with a wide bid-ask spread.
The Bottom Line
If you aren’t using volume in your trading, you are missing out on a tool that can help you make better decisions. The more you understand about what volume means and how it can affect your trades, the better the chances are that you will become profitable. Always remember that different securities will have different average volumes and that there are several disadvantages to trading a security with low volume.