Buying and Selling Volume
Volume as an Indicator in Day Trading
Volume is the number of contracts, shares, or forex lots that are traded during a particular time frame. Daily volume is the number of contracts that are traded during one trading day. One-minute volume is the number of contracts traded within 60 seconds.
High volume is an indication that a market is actively traded, and low volume is an indication that a market is less actively traded. Some assets tend always to have high volume, as they are popular among day traders and investors. Other assets tend always to have low volume, and aren't of particular interest to short-term traders. There is also "relative" volume. For example, when stock typically has high volume, but volume drops off, it indicates traders are losing interest in the asset, at least temporarily. Similarly, when an asset with typically lower volume sees higher volume, it indicates new interest and activity in the asset.
Volume is often shown along the bottom of an asset's price chart. It is usually shown as a vertical bar, representing the number of shares, contracts, or lots traded during the time frame shown on the chart. For example, if viewing a one-minute price chart, there would be a vertical volume bar below each price bar, showing how many shares changed hands in that one-minute.
Buying and Selling Volume
Total volume is made up of buying volume and selling volume. Buying volume is the number of contracts that were associated with buying trades, and selling volume is the number of contracts that were associated with selling trades. This is often confusing for new traders because every trade requires both a buyer, a trader that is buying a contract, and a seller, a trader that is selling a contract. Yet, you can distinguish buying volume from selling volume, based on whether a transaction occurs at the bid price or ask price.
Bid and Ask Volume
Every trade occurs at either the bid price or the ask price. The bid price is the highest current price someone is stating they will pay for shares or contracts. The ask price is the lowest current price someone is stating they will charge to sell shares. There is always a bid and ask price in an actively traded stock. However, the bid and ask price may change, as traders buy and sell assets, or change their minds about their current bid or offer. When you decide to buy or sell, you can put out a bid to buy or offer to sell, you can buy instantly from someone posting an offer, or you can sell instantly to someone posting a bid.
When a transaction occurs at the bid price, it is known as bid volume. Bid volume is selling volume because it has the potential to move the price down. Assume someone is bidding 100 shares at $10.01 and someone is also bidding 100 shares at $10.02. When another trader sells 100 shares to the person at $10.02, that bid will disappear, and the new bid will be the lower price of $10.01. The selling volume at the bid lowered the price.
When a transaction occurs at the ask price, it is known as the ask volume. Assume a trader is offering 100 shares at $10.01 while another trader is also offering 100 shares at $10.02. When a trader buys 100 shares $10.01, that offer will disappear, and the new offer will be the higher price, $10.02. The buying volume at the offer pushed up the price.
More Buyers or Sellers
When a market is experiencing more buying volume than selling volume, it means that there are more traders buying at the ask price, which has a tendency to push up the price. When a market is experiencing more selling volume than buying volume, it means that there are more traders selling at the bid price, which has a tendency to push the price down.
However, the number of buyers and sellers can change at any moment, and often change many times even in short time frames, and this is what causes the markets to move in upward and downward waves rather than only in one direction.
Final Word on Buying and Selling Volume
Volume is the number of contracts, shares, or lots that change hands over a specified time period. Buying volume is the number of contracts that change hands at the ask or offer price. Selling volume is the number of contracts that change hands at the bid price. Changes in volume, and whether more transactions are occurring at the bid or offer, give traders short-term indications of where the price could go next. Unfortunately, who is buying and selling, and where, is in constant flux. Therefore, volume tells you a lot about the market, but it is just one tool and shouldn't be solely relied on to make trading decisions.