How to Use Volume in Trading - Use Volume to Improve Your Day Trading (2024)

FAQs

How to use volume for day trading? ›

Volume is an important indicator that every day trader should understand. Generally, you want to look for stocks that have high volume. Rising volume and price often mean buyer interest, which makes the stock more liquid, and quicker and easier to buy and sell.

1. Select a time frame: Determine the specific time frame for which you want to analyze the Volume Profile, such as a day, week, or month. 2. Divide the time frame into price intervals: Divide the selected time frame into smaller price intervals, such as 0.5 points, 1 point, or any other desired increment.

The RVOL is displayed as a ratio. So if it is showing 3.5 relative volume, that means it is trading at 3.5 times its normal volume for that time period. As day traders we like to see RVOL at 2 or higher with a positive catalyst, low float and ideally a higher short interest.

There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume.

Average Daily Trading Volume (ADTV) refers to the number of shares of a particular stock that, on average, change hands during a single trading day. Significant deviations from the ADTV usually indicate greater or lesser buying or selling interest in the stock from large institutional investors.

Volume is an important indicator in technical analysis because it measures the relative significance of any market move. If the market moves a large amount during a given period, then the strength of that movement either gains credibility or is viewed with skepticism based on the volume observed.

If the recent data shows a high volume, traders can place orders along with the current trend, and if the recent data shows a decreasing volume, it is better for the traders to trade against the trend.

To reduce such risk, it's best to stick with stocks that have a minimum dollar volume of $20 million to $25 million. In fact, the more, the better. Institutions tend to get more involved in a stock with daily dollar volume in the hundreds of millions or more.

Five, eight, and 13-bar simple moving averages (SMAs) offer relatively strong inputs for day traders seeking an edge in trading the market from both the long and short sides. Moving averages work as macro filters as well, telling the observant trader the best times to stand aside and wait for more favorable conditions.

How do you use relative volume at time? ›

The formula used is: relative volume = current volume / average volume. If we assume the specified time period is 10 days and the RVOL ratio for a stock is 1.0, the formula indicates that the current volume trading is the same as its 10-day average volume.

With the total volume, the best you can do is make the assumption that if the price is going up then most of the volume is buying. If the price is going down then its more selling volume. Otherwise, you would need to look at the trade and/or quote bars to get a more precise representation.

With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].

High or increasing volume in an uptrend can signal a buying opportunity. Decreasing volume in an uptrend may suggest that it's time to sell and take profits. High or increasing volume in a downtrend can signal that it's best to stay on the sidelines.

Average volume (10-day): Indicates the size of the volume of shares being traded for the individual stock. This is an average of the last 10 trading days, so it measures activity over roughly two weeks. Last (time) and last (size): Shows the last trade for a stock and how many shares were bought or sold.