Most investors don’t know the significance of a stock’s daily volume. Learn the four wonders of high volume and the four dangers of low volume.
Volume plays a very important role in stock trading especially, when day trading. For those of you who don’t know what volume is, it’s the total amount of shares traded of any individual stock at any given time including the market close. Closing volume is the total amount of shares traded for the day. Volume plays a very important role for a successful day trader. The following is just a few of them:
The Four Wonders of High Volume
- It helps create more sustained momentum whether the stock is going up or down.
- It helps you safely execute market orders within a tighter spread (the difference between Bid and Ask prices).
- It warns you when a stock is ready to breakout to the upside or fall to the downside of a trend.
- It gives you more time to achieve the profit you are seeking.
The Four Dangers of Low Volume
- Low volume creates wider spreads between the bid/ask prices (the difference between Bid and Ask prices).
- Low Volume creates untrustworthy trends and momentum.
- Low Volume attracts scam traders who want to manipulate the price of a stock.
- Low volume creates volatility in the price of a stock.
Volume & Trends
High volume sustains more momentum which helps create trends. A trend is your friend because it signals which way the stock is moving. High volume also helps keep bid/ask spreads tighter making it easier to play market orders which assures you of a successful execution of a stock in motion. However, I suggest using limit orders on a stock that is trading sideways. When volume and price rise together, this is a sign of a breakout to much higher prices in the future; especially if a stock is coming out of its low resistance (the trough), and the volume has been building for three days.
How Volume can get you
Buying Low volume stocks; especially stocks that have a large percentage gain, is very dangerous. These type of transactions are risky because bid/ask spreads tend to be wider. Example: Stock (XYZ) Bid 3.00 Ask 3.28 volume 1,500. The danger here is there is not enough volume to turn the shares at a higher price. Let’s say you are successful in purchasing 2,500 shares at 3.28, and you now expect to sell them for more. The problem here is the bid price will more than likely stay at or near 3.00; you can’t sell a stock when there’s no buy demand.
Stock scammers will buy a few shares at the 3.28 price to get the price to jump to 3.28, knowing there isn’t sufficient volume to turn the shares they are holding which they bought at 2.75 a week or two earlier. They will buy a few shares at a time until a sucker comes along and knows nothing about volume, he just sees that the price is up .28 and thinks the stock will continue to climb. He doesn’t even have a clue he’s been set up by the traders who bought in at 2.75 a week or two earlier.