What is trading volume and how is it measured?
Editorial staff, J.P. Morgan Wealth Management
- Volume is the measure of all the transactions that occur between a buyer and seller of a financial asset during a given period of time.
- Trading volume can be useful to track the significance of a change in the market, especially for technical analysts. When the price of a security changes, if volume is high, it usually means that the move is more significant than if volume is low when that price change occurs.
- Technical traders can utilize volume information in picking trade entry and exit price points.
- In general, volume is highest right after the market opens and right before it closes. Volume also tends to be higher on Mondays and Fridays and lower mid-week.
Volume measures the amount that a financial asset changes hands during a given period of time. For stocks, volume is based on the number of shares traded, and for futures and options, volume is measured in terms of contracts. A transaction refers to a buyer agreeing to purchase an asset from a seller at a specified price. Each transaction adds to the security’s volume count. For example, if 10 transactions for a security happen in a day, its volume for that day would be 10. Securities with high daily volume are generally more liquid than those with low daily volume.
Why is volume important to traders?
Technical traders keep a careful watch on securities’ trading volumes and how they change over time. This is because trading volume can be used to track the significance of a change in the market. If the price of a security changes and the volume is high, then traders interpret this move to be more significant than if volume is low when that price change occurs.
Determining entry and exit points
Volume levels are an important way that technical analysts find entry and exit price points. An entry point is the price where an investor buys or sells a security to initiate the opening of a position. An exit point is the price at which an investor closes, or intends to close, their open position. Closing a long position in a security would mean selling it, whereas closing a short position in a security would mean buying it back.
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How often is volume measured?
Throughout the trading day, volume data is reported as often as once per hour. However, these hourly reports are just estimates of volume. Estimated volume numbers are also reported at the end of each day. Actual volume data is published the following day. Investors can also look at a security’s tick volume, which shows the number of changes in its price. Because prices tend to fluctuate more when trading volume is higher, tick volume can be used as a surrogate for trade volume.
When does volume tend to be high and low?
In general, volume is highest right after the market opens and right before it closes. Volume also tends to be higher on Mondays and Fridays and lower midweek. Additionally, volume usually slows down around lunchtime and before holidays. However, these are just rough trends based on historical data. If a major event happens at any time, such as a release of economic data or news about a company, it could trigger a surge in trading volume.
The impact of high-frequency traders and index funds
Trading volume statistics in the U.S. can be impacted by high-frequency traders (HFT) and index funds, which both have the potential to increase trading volume significantly., High-frequency trading utilizes computer algorithms to analyze markets and leverages that speed to fire off a high volume of trades based on changing market conditions. An index fund is a kind of mutual fund or exchange traded fund (ETF) that is set up to match or track a market index like the S&P 500.
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Editorial staff, J.P. Morgan Wealth Management