Buying and Selling Volume

Volume as an Indicator in Day Trading

The businessman who confirms the stock prices
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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.

Key Takeaways

  • Volume is the number of contracts, shares, or forex lots that are traded during a particular time frame.
  • High volume is an indication that a market is actively traded, and low volume is an indication that a market is less actively traded.
  • Total volume is made up of buying volume and selling volume. You can distinguish buying volume from selling volume based on whether a transaction occurs at the bid price or the ask price.
  • Changes in volume can give traders short-term indications of where the price might go next.

High, Low, and Relative Volume

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 a stock typically has high volume but volume drops off, it indicates that traders are losing interest in the asset, at least temporarily. Similarly, when an asset with typically lower volume sees higher volume, that indicates new interest and activity in it. 

Volume is often shown along the bottom of an asset's price chart. It is usually depicted as a vertical bar, representing the number of contracts, shares, or lots traded during the time frame shown on the chart. For example, if you're viewing a one-minute price chart for a futures contract, there would be a vertical volume bar below each price bar, showing how many contracts changed hands in that single minute.

Buying and Selling Volume

Total volume is made up of buying volume and selling volume. Buying volume is the number of shares, contracts, or lots that were associated with buying trades, and selling volume is the number associated with selling trades. This concept is often confusing for new traders because every trade requires both a buyer and a seller of the given asset. However, you can distinguish buying volume from selling volume based on whether a transaction occurs at the bid price or the ask price

Bid and Ask Volume

The bid price is the highest current price that someone is stating they will pay for an asset. The ask price is the lowest offered price at which someone is willing to sell the asset. There is always a bid price and an ask price in an actively traded asset. The bid and ask prices fluctuate as traders buy and sell the asset or change their minds about their current bid or offer. When you decide to buy or sell, you have three options:

  • Put out a bid to buy, or an offer to sell
  • Buy instantly from someone posting an offer
  • Sell instantly to someone posting a bid

When a transaction occurs at the bid price, the number of assets changing hands contributes to the bid volume. Bid volume is selling volume because it has the potential to move the price down. Suppose a trader is bidding 100 shares at $10.01, and a different trader is bidding 100 shares at $10.02. When yet another trader sells the 100 shares to the second trader 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, the number of assets changing hands contributes to the ask volume. Suppose a trader is offering 100 shares at $10.01, and another trader is offering 100 shares at $10.02. When yet another trader buys the 100 shares at $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 there are more traders buying at the ask price, which has a tendency to push the price up. When a market is experiencing more selling volume than buying volume, it means there are more traders selling at the bid price, which has a tendency to push the price down.

The relative number of buyers and sellers can change at any moment and, in fact, often changes many times, even in short time frames. That's what causes the markets to move in upward and downward trends rather than only in one direction.

Trading Based on Volume

Changes in volume—and identifying whether more transactions are occurring at the bid or offer price—give traders short-term indications of where the price might go next. Unfortunately, the numbers of people buying and selling—and the prices they're buying and selling at—are in constant flux. Therefore, volume can tell you a lot about a particular market, but it is just one tool and shouldn't be solely relied on to make trading decisions.

How Do You Find the Ask Volume As Opposed to the Bid Volume?

The "bid size" and "ask size" will tell you how many shares are behind the bid and ask price. The size is typically measured in lots of 100 shares. For example, if the asking price is $9, and the ask size is 15, then that means there are currently 1,500 shares available to buy for $9. These numbers constantly change as new orders come in and get filled, so the lot size does not necessarily guarantee all of those shares at that price.

How Does a Stock's Volume Affect Its Price?

Trading volume doesn't necessarily have an impact on the value of a company, but it could affect the way the stock price moves. Movements are more likely to be jerky when there are fewer transactions. That's because, the longer the delay between two transactions, the more likely it is that something has happened to significantly change the value of the company. When transactions happen many times per second, on the other hand, the price is unlikely to move more than a penny or two between each of those trades.