Trading Volume

Fundamentals · Sep 3, 2019

When it comes to trading, people often look at asset prices and analyze its fluctuations with various methods but there is another thing which can tell us a lot about security: its trading volume.


Today we’ll explain what trading volume is and how to use it.

Trading Volume Definition

Trading volume in capital markets is the amount of stocks, bonds or any other traded securities which was bought or sold during a particular period of time, often one trading day. Trading volume shows how many transactions involving a particular asset or group of assets were executed within a particular time period.

Simple Example of Trading Volume

Imagine a local market on which people trade fresh fruits and vegetables and it has two seller tents nearby: the first seller in the tent “A” sold 100 apples today, and the seller in the second tent “B” sold 50 carrots today.

So, for today, the total trading volume was:

  • Tent A: 100 apples
  • Tent B: 50 carrots

The financial market with securities works in exactly the same way, except it’s much bigger and faster. Just change apples with Apple Inc shares and change carrots with Tesla shares and you’ll get a good understanding of what’s going on in the securities markets. In real life, there are usually many tents for each product so, to get the total trading volume, we would add up the trading volume of everyone who trades the same product.

We could even calculate the total market volume for all products on this market but this is better to be measured in units of currency and not in goods or services. Currencies are means of indirect exchange and they allow us to measure value detached from particular goods and services that might be more volatile and illiquid. In the financial markets, people don’t buy things to consume them, they often trade the same asset back and forth within the same day in hope to make a profit.

Another difference between the fruits and vegetables market above and the financial market is that players in the financial world are less equal in their demands and a rich man can make one huge transaction with many units and this would weight more than actions of thousands of “smaller” people with limited capital.

Real Life Example of Trading Volume

Let’s look at Tesla, Inc. (TSLA) stocks traded on NasdaqGS.

On the 5 years chart history, we can see not only the price of the stock but also small lines under it - those lines show trading volume. Almost any price chart would show trading volume as well as the price itself by default.

For Tesla stocks, we can see peaks of market activity at 90+ million traded stocks per week in 2018 (4th, 8th and 10th month) and then another spike in May 2019. Before that, investors weren’t that interested in this stock, except in 2013, when the stock price had been on the rise.

The Average Volume

The trading volume is usually measured daily but it’s tracked almost instantly down to minutes and hours. Some charts, especially those that cover long periods of time, would show the volume on a per week or even per month basis. Certain investors and portfolio managers track the so-called “10 Day Average Volume” indicator or any other average like Average Daily Trading Volume (ADTV) because they don’t want to see volume changes that cover short periods of time if it’s unrelated to their strategy.

Such averages can be helpful for long-term historical analysis of an asset because it can represent liquidity of a corporation.

How to Use Trading Volume Data?

What this trading volume data in the stock market can tell us?

We’ll continue with our previous Tesla example.

The majority of market participants concentrate on stock price and many of them prefer to use some kind of a technical analysis.

The trading volume can tell you something else, an additional piece of the puzzle. You don’t even have to look at price, some useful information can be extracted from trading volume alone.

In our example, we have seen high levels of activity in 2013 and 2018.

What happened back then?

Well, we know one thing for sure - something did happen.

Tesla Model S, the first mass-market electric car, entered the market in 2012 - 2013.

Well, a vehicle for $70,000+ (which is the current price, it used to be even higher) hardly can be called a mass-market product, but on the market of electric cars at that time it kind of was. Plus, Model S was much more affordable than the Tesla Roadster sports car.

So, in 2013, Tesla company in started to get more attention as its cars were successfully delivered to buyers. This was the key moment for the company and people finally believed in Elon Mask’s vision when they witnessed the practical result of his plans.

That was a promising sign for investors and they started to show more interest in the company.

2018 was a big year for Tesla too. Total production more than doubled (34k => 86k), but a more important thing was that the total sales tripled in 2018 (30k => 90k). Most of it thanks to the Model 3, the first real mass-market electric car.

Those are the facts and crucial milestones of the company’s history, and we can see a reflection of them on the market volume as well as on the stock’s price. A big increase (or decrease) in trade volume is a sign of some market action and the main problem is to figure out what this action is and in what way it would affect the price.

Here are some of the correlations between stock prices and their trading volumes:

  • Trading volume in general is an important sign of liquidity
  • High volume indicates an active market with a narrow spread between bid/ask prices
  • News, reports and big events usually increase the volume
  • A significant sudden increase in volume may be a sign of a new trend
  • Consistent high volume may suggest that the current trend is strong
  • Stable low volume for a long time says that market participants are uncertain about the trend or they are just not that interested in this particular asset

It can be very hard to make a conclusion about the future price movements based only on trading volume. Sometimes, the volume is low on a stable bull or bear market (the trend was expected), sometimes it’s high (the price is pushed by something like news piece). The volume tells us how active people are at a particular period of time, but this activity itself doesn’t predict the price.

There can be a huge volume increase but the price won’t move at all, in this case, we might be seeing a fight between equally strong bears and bulls.

News and Trading Volume

Often, a rise in trading volume can be seen as an immediate consequence of a certain news publication, if it’s related to a stock. This is quite normal and it tells us that more people have entered the game, or that more people have decided to quit the game after evaluating this publication.

Basically, the volume shows a perception of people and their behavior, but we shouldn’t forget that the high volume doesn’t always mean that more people are trading the stock, it means that more stocks are traded, but they might be traded by a small group of private investors, banks or other powerful entities.

In addition to that, big transactions are rarely done fast and as a single deal. For example, if someone holds a huge share of a company and he wants to sell it, he would prefer to sell it slowly and quietly in order to hide his initial plan because if this plan is known to public, the price would probably plunge and he wouldn’t make an expected amount of money from this deal.

By watching the correlation between news and changes in trading volume, it’s easy to see how people react: everything is quite predictable. What would be more interesting to analyze is the big changes in volume when there is no significant news, this might suggest that something significant is going on but the public doesn’t know about it.

investing   trading   analytics   finance   indicators   market   volatility

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