Stock Market Volume, like other technical indicators, is used to predict short term trends in price movements of stocks. As a definition, volume is the number of shares traded in a certain security over some defined period of time. It can also be the volume of shares traded in a market index.
In its simplest form, volume is often thought to be a measure of liquidity in a stock. Liquidity is the ease to buy and sell. If a stock has heavy trading volume, that means there’s a lot of interest in that stock. Conversely, if there is little interest in a stock, it is said to be “thinly traded.” Securities with light volume often have greater incremental trading price spreads. This is just a fancy way of saying that thinly traded stocks tend to have greater price volatility.
For predicting price movements, knowing about a stock’s volume is in itself fairly useless. It’s like having a stable without a horse. To use volume correctly, we need to look at a couple things, the first being the volume trend.
Volume trend tells us whether the stock’s volume is increasing or declining. Either way, a trend depicts increasing interest or decreasing interest. Interest has nothing to do with price. You can have a steep upward trend in volume and declining prices. Maybe the entire executive class of a corporation is being sent off to prison. In the old days, they would jump out the windows, but now you can’t open the windows. In any case, having the president and his posse carted off to the nearest federal minimum security country club can cause lots of interest in a stock, much of it negative - volume up, stock price down.
So, remember, whether you’re looking for trophy fish, or trying to make a profitable trade, technical indicators can help, but they’re not the final word in success.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.