Besides price, volume is one of the most important indicators that you should pay attention to when making a decision to buy or sell a stock. When a share of stock is traded, it is added to a volume number for a specific period of time. This includes each purchase or sale of shares.
As an example, if five trades are made in a stock in a specific period of time — let’s say 5 minutes — the total amount of shares traded would equal the total volume for that 5-minute time frame.
– First trader purchases 1000 shares
– The second trader sells 500 shares
– Third trader purchases 200 shares
– The fourth trader purchases 3000 shares
– The fifth trader sells 5000 shares
The total volume of shares for this five-minute time frame would be equal to 9700 shares. As you can see, it does not matter if it was a buy or sell. All shares are included in the total volume figure.
Volume and Areas of Support or Resistance
As a trader or investor, you can track volume to give you clues that will help you make buy or sell decisions. This is especially true in areas of support or resistance for a stock. Since price is moved by supply and demand, an increase of shares bought would eat up supply. In areas of resistance, the price would move up with more supply taken out.
This is where volume comes in to play. If only one trader purchases 100 shares at a level of resistance, that level is likely to stay strong. However, if the volume increases and 30 people purchase 100 shares, there’s a higher chance of an escalation in price since more supply is being taken out. Here’s an example:
$8 – 14000 shares available by sellers
$8.10 – 2000 shares available by sellers
$8.20 – 1700 shares available by sellers
$8.30 – 500 shares available by sellers
If there is heavy resistance for a stock at $8 and the total amount of shares available for sale at that price is equal to 14000, it will take buy orders equal to 14000 shares to match those sell orders. Imagine if good news is announced and other traders believe that the news is positive for the company. This may lead them to place larger purchase orders, which would increase the volume of trading activity on the buy side.
If orders for 15,000 shares are placed on the buy side, the price of the stock will move to $8.10. At that point, it will only take buy orders of 2700 shares to move the stock to a price of $8.30.
Accumulation and Distribution
Why is this important? If you see a high volume of shares being accumulated and the price is moving up, there may be some type of news event that is positive for a stock — you may want to take a position. Of course, this works in the opposite way too. If an increase in volume is present when the shares of a stock are falling, it indicates more sellers than buyers and the presence of distribution. You may want to get out of a situation like this.
You can use volume when you make a trade to buy or sell by seeing if there is accumulation or distribution occurring in a stock. It is a concept that will help you choose price points that are more favorable.
Jim Treebold is a North Carolina based writer. He lives by the mantra of “Learn 1 new thing each day”! Jim loves to write, read, pedal around on his electric bike and dream of big things. Drop him a line if you like his writing, he loves hearing from his readers!