What is volume in trading?

Trading Education

Table of Contents

This is another article on the site

This is also a heading
This is a heading

View Table of Contents

This is another article on the site

This is also a heading
This is a heading

 
class SampleComponent extends React.Component { 
  // using the experimental public class field syntax below. We can also attach  
  // the contextType to the current class 
  static contextType = ColorContext; 
  render() { 
    return <Button color={this.color} /> 
  } 
}

What is volume?

In trading, volume is the total number of shares, contracts, or units traded in a given period of time. Every time a trade happens, it means a buyer and a seller have agreed on a price, and that transaction adds to the total volume.

The more actively an asset is traded, the higher the volume. If fewer trades happen, the volume is lower.

What counts as volume?

A common mistake people make is thinking that the number of traders involved affects volume. But that’s not how it works!

Volume only counts the number of shares or contracts traded, not the number of traders involved.

Let’s break it down with an example.

Imagine Trader A wants to buy 10 shares of Apple (AAPL).

For this trade to happen, there must be a seller. That’s where Trader B comes in — who is willing to sell 10 shares of AAPL.

Now, Trader A buys 10 shares from Trader B.

So, what is the volume?

Some people might think it’s 20 (since there’s a buyer and a seller), but that’s incorrect.

The correct answer is 10 because volume only measures the total number of shares traded — not the number of traders involved.

Since 10 shares changed hands, the volume is 10.

Now, let's look at a real example of how volume looks on a stock chart.

The bars at the bottom represent the number of shares traded each day. On this specific day, 129,487,373 shares of NVIDIA (NVDA) were traded.

Higher volume bars indicate more trading activity, showing strong interest from traders. Lower volume bars mean less activity, suggesting weaker participation.

Why do stocks go up and down if volume is the same?

In volume, there is no such thing as “more buyers than sellers.”

Every single trade has both a buyer and a seller. If someone is buying a stock, someone else must be selling it.

So, if the number of buyers and sellers is always the same, then why do stock prices go up and down?

The key to price movement isn’t the number of buyers or sellers — it’s who is more aggressive.

Aggressive buyers are those who are willing to buy at a higher price.

Aggressive sellers are those who are willing to sell at a lower price.

Let’s understand this with a simple example.

We have Mike and Joe. Mike wants to buy an iPhone and is willing to pay $1,000.

Joe wants to sell his iPhone, but he is asking for $1,200.

Now, we need to see who is more aggressive — the buyer or the seller.

If the iPhone is sold for $1,200, Mike is the aggressive one. This is aggressive buying because Mike really wants the iPhone and is willing to pay whatever price the seller is asking.

If the iPhone is sold for $1,000, Joe is the aggressive one. This is aggressive selling because Joe really wants to sell his iPhone and is willing to accept the lower price that Mike is offering.

This same idea applies to stocks. If buyers are aggressive, they push prices up by paying whatever sellers are asking. If sellers are aggressive, they push prices down by accepting lower offers.

How does volume help us?

Now that you understand what volume is, let’s talk about how it helps us.

Volume shows the strength behind a move

It helps us determine the strength of price movements. If the price is trading with high volume, it means a strong move — vice versa. If a strong is trading with low volume, it is considered a weak move.

The strength of a price move depends on both candlestick size and volume.

A strong move-up has a wide green candle with high volume, confirming strong buying pressure.

A weak move-up has a wide green candle but low volume, suggesting the move lacks real strength.

A strong move-down has a wide red candle with high volume, confirming strong selling pressure.

A weak move-down has a wide red candle but low volume, meaning the price drop may not be sustainable.

Here is how strong and weak move-up looks on the price chart.

Volume shows liquidity

It shows how easy it is to Buy or Sell the stock. Volume helps determine a stock’s liquidity.

High volume = High liquidity → Many traders are buying and selling, making it easy to enter or exit a trade at a fair price.

Low volume = Low liquidity → Fewer traders are active, making it harder to buy or sell, and you may have to take a worse price.

Let’s say you want to trade Stock A and Stock B:

Stock A has a high volume with many buyers and sellers. If you place an order, it gets filled quickly at the expected price because there is enough trading activity.

Stock B has a low volume with fewer traders. If you place an order, you may have to wait longer or accept a different price to complete the trade because there aren’t enough people trading it.

What is considered high or low volume?

In trading, volume refers to the number of shares being bought and sold during a specific period. But how do we know if a stock’s volume is high or low?

The answer depends on the stock’s average volume.

How to determine average volume?

An easy way to check if a stock has high or low volume is by using Relative Volume (RVOL).

RVOL compares today’s trading volume to the stock’s average volume and helps traders see if the stock is being traded more or less than usual.

If RVOL is above 1, it means the stock is trading with higher-than-normal volume. This usually leads to stronger price movements and better liquidity, making it easier to buy and sell.

If RVOL is below 1, it means the stock is trading with lower-than-normal volume. This suggests weaker price movements and less liquidity, making it harder to trade smoothly.

High volume: more trading activity, stronger moves

A stock has a high volume when its current trading volume is higher than its usual average. This means more traders are actively buying and selling, which usually leads to stronger price movements and better liquidity.

Let’s say a stock normally trades 2 million shares per day. If today’s volume jumps to 6 million shares, that’s three times the normal volume.

Now, we check RVOL:

RVOL = (Current Volume) ÷ (Average Volume)

RVOL = 6 million ÷ 2 million = 3.0

Since RVOL is greater than 1, this stock is trading much more than usual and is likely making a bigger move.

Low volume: less trading activity, weaker moves

A stock has low volume when it is trading less than its usual average. Low volume means fewer traders are participating, which can lead to slow price movement and wider bid-ask spreads, making it harder to buy or sell at the price you want.

Let’s say a stock usually trades 5 million shares per day, but today’s volume is only 1 million shares.

Now, we check RVOL:

RVOL = 1 million ÷ 5 million = 0.2

Since RVOL is below 1, this stock is trading less than usual, meaning price movements may be weak or choppy.

Why High or Low Volume Matters?

High-volume stocks usually offer better trading opportunities because they move more and are easier to trade. Low-volume stocks may be slow-moving or harder to trade, leading to poor liquidity and unpredictable price movements.

By using RVOL, traders can quickly find active stocks with strong movements and avoid stocks that are slow or difficult to trade.

‍

Trading Education

Apr 15, 2025

Risk Management in Trading

Trading Education

Apr 15, 2025