Day Trading Based on Buying Volume and Selling Volume

Introduction to Volume and how to use it.

buying and selling volume on a 1-minute chart
FreeStockCharts.com

Volume is how many shares (or contracts) exchange hands in a stock (or futures contract) over a specific time period. It's a key metric because it lets traders know the liquidity level of an asset--how easy it is get into or out of a position close to the current price (which frequently changes).

Buying Volume and Selling Volume

The higher the volume the easier it is to buy and sell large (or small) quantities of stock, because other traders are there to fulfill the other side of the trade.

 

For each transaction there must be a buyer and seller. To buy a seller must sell to you, and to sell a buyer must buy from you. 

This leads to some confusion because you'll often hear phrases like:

  • The sellers are in control.
  • Buying volume is outstripping selling volume.
  • It's a heavy buy volume day.

Buyers are in control when the price is getting pushed higher. Buy volume is volume that occurs at the offer price. It is the lowest advertised price sellers are willing to sell at. If someone buys at that price it shows the stock is desired (by that person) and is called buying volume (see Day Trading Basics: The Bid Ask Spread Explained).

Sellers are in control when the price is getting pushed lower. Sell volume is volume that occurs at the bid price. It is the highest advertised price buyers are willing to buy at. If someone wants to sell at that price it shows the stock isn't desired (by that person) and is called selling volume.

Volume is typically displayed along the bottom of a stock price chart. Volume is depicted in vertical bars, with the bar showing how many shares exchanged hands over a particular time period. The attached chart shows an example of a 1-minute chart, where each volume bar along the bottom shows how many shares were traded in each one minute period.

The volume bars on a daily chart show how many shares change hands during the course of each day.

Volume bars may be colored. A red volume bar means the price declined during that period and the volume during that period is considered selling volume (estimated). If the volume bar is green then the price rose during that period and the volume is considered buying volume (estimated). 

Relative Volume

Day trading a stock with lots of volume is preferred by many traders as it allows you to get into and out of a position quickly, with large or small positions (see What to Look For in a Day Trading Stock).

Average volume is how many shares change hands in a stock on a normal day. Some days will have much higher volume than normal, and other days will see lower volume.

Pay attention to days which have higher than usual volume. Usually such days are associated with volatility and large price moves either up or down. If most of the volume is taking place at the bid price (discussed prior) then the price will move lower and the increased volume shows sellers are very eager to get out of the stock. 

If most of the volume is taking place at the offer price then the price will move higher and the increased volume shows buyers are very eager to get into the stock.

 

Increased volume shows something has likely happened in the stock--such as a news release or traders have become worried or euphoric about the stock's potential.

Day traders tend to gravitate toward stocks or ETFs with a high average volume (see Most Popular Stocks and ETFs for Day Trading), and/or stocks or ETFs that are seeing higher than usual volume on a particular day. Lower than average volume shows lower interest in the stock on that day, and likely smaller price movements. 

Using Volume to Analyze Stock Price Movements

While it is not necessary, monitoring volume can aid in analyzing stock price movements. Here are some guidelines for using volume:

  • Increasing volume shows conviction of buyers and sellers in either pushing the price up or down respectively. For example, if the trend is up and volume increases as the price moves higher, it shows buyers are very eager to buy and this is typically associated with larger moves to the upside.
  • A trend can persist on declining volume for long periods of time, but typically declining volume as the price trends indicates the trend is weakening. For example, if the trend is up but volume is steadily declining, it shows there are fewer people willing to buy and keep pushing the price up. That said, the trend won't change until there is more large-scale selling volume than buying volume.
  • Volume should ideally be larger when the price is moving in the trending direction, and lower when moving against the trend (pullbacks). This shows the movement in the trend direction is strong and the pullbacks are weak, making the trend more likely to continue.
  • High volume accompanied by sharp price movements against the trend are a sign the trend is weakening, and/or susceptible to a reversal (related to point above).
  • An extreme volume "spike" where volume is way more than normal--5 to 10 times (or more) average volume (for that time or period) for example--could indicate the end of a trend. These are called exhaustion moves because typically when so many shares change hands there is no one left to keep pushing the price in the trending direction and it reverses (often quickly). 

Final Word on Trading Volume

Volume can be useful when day trading. If for nothing else, use volume to help isolate stocks you want to day trade. Ideally day trading stocks should have lots of average volume so you can enter and exit easily; this helps to control risk (as you can get out of losses where you want with minimal slippage) and it also makes collecting your profits easier (lots of other traders willing to take your position from you when you are satisfied with your profit).
 

Volume can also be used to help analyze the trend of a stock, helping to assess how likely it is that the trend will continue to reverse. Volume analysis isn't perfect though. It is just supplemental information; analyzing volume is not required to day trade successfully. Trading decisions should be based on price movements first and foremost, as price movements are what determine profits and losses. Formulate a stock day trading strategy based on price movements, and then add in volume analysis to see if it improves your performance.