Volume is the quantity of a security that trades between buyers and sellers.
Volume is measured on a trade-by-trade basis, totaled over a given time period, and even
calculated across an entire market.
In this video, we'll define volume, show you how to read it on a chart, and explain
how some investors use volume to confirm trends.
In the stock market, volume is expressed in shares.
A share of stock represents partial ownership of a company, hence the term share.
A share is the basic unit that describes the quantity of a stock and other securities.
Volume is the number of shares exchanged in a single transaction.
For example, if a buyer purchases 200 shares of stock from a seller, the total volume of
this transaction is 200 shares.
Countless transactions just like this take place during the trading day.
The volume indicator keeps track of all these transactions and totals the number of shares
traded over any given time period.
The volume indicator is usually displayed at the bottom of a stock chart as a histogram.
Each bar of the histogram shows the total volume traded for a given time period.
For instance, if you're looking at a daily chart, each bar of the volume histogram represents
the total volume traded per day.
If you're looking at a very short-term chart, like a 1-minute chart, each bar of the volume
histogram represents the total volume traded per minute.
Volume is often averaged over time, particularly during the daily time period.
This is called average daily volume.
Some investors compare today's volume to average daily volume over a number of days
in the past.
Investors typically use 20 or 30 days to calculate average daily volume, although any historical
range can be used.
Comparing today's total volume to the 20-day average, for example, can help an investor
judge the validity of a move in the price of a security.
Some investors who use technical analysis believe that moves in price on higher-than-average
volume are more valid than moves on lower-than-average volume.
For example, if a stock breaks above resistance on higher-than-average volume, some investors
believe that this is confirmation and the stock is more likely to continue higher.
The theory is price moved higher with the support of many investors buying, which is
what the higher-than-average volume reveals.
Therefore, higher-than-average volume lends credibility, and can help confirm price moves.
Conversely, price moves on lower-than-average volume are thought to be less credible because
they lack the participation of many investors.
Some investors might view a break above resistance on lower-than-average volume with skepticism,
thinking the break might be false because it lacked participation.
Just like with stocks and other securities in the stock market, some investors define
and apply volume the same way in the futures market.
The difference with futures is that the basic unit of a transaction is known as a contract.
That's because futures represent a contract between a buyer and a seller.
So instead of looking at shares per trade, or the average daily volume of shares, futures
traders analyze contracts per trade and average daily volume of contracts.
Here's an example of a futures contract that tracks the S&P 500 stock index.
This contract is known as the S&P 500 e-mini and trades with the symbol ES .
As you can see, daily volume for the ES looks similar to the stock examples we examined
earlier.
Investors also use the term contract to describe volume in the options market.
But volume is not applied in options like it is in stocks and futures.
That's because options are based on underlying securities like stocks.
And the price movement in an underlying security, and its accompanying volume, is more influential
than volume in the options contract.
So instead of using options volume to confirm price moves, some options investors apply
volume differently.
They might limit their options trading to contracts that regularly have active volume.
This can be a sign that transaction costs might be lower because of tighter bid/ask
spreads.
The important point to remember is volume in options is typically not used to confirm
trends in an underlying security.
But that's how it's applied in stocks and futures, which makes volume an important
aspect of technical analysis.
Volume reveals how many investors participate when a security's price changes.
And the more participation, generally the more credible
the move.