Volume is the total number of shares or contracts traded for a specific security or across an entire market during a given timeframe.
Understanding trading volume
Elephants, when looking at a financial chart, volume is the data point that measures transaction activity. It is usually displayed as a series of vertical bars at the bottom of a price chart. Each bar represents the number of shares that changed hands during that specific period, whether the chart is set to a one-minute interval or a daily interval. High volume indicates that a large number of shares were bought and sold, while low volume indicates fewer shares were traded.
Traders look at volume to confirm price trends and chart patterns. If a stock price moves higher and breaks out of a prior trading range, high volume shows strong market participation and makes the breakout more reliable. If the price moves on low volume, the move might lack conviction and could easily reverse. Market analysts often rely on volume data to determine if a price trend has the momentum to continue.
Volume also dictates the liquidity of an asset. A high-volume stock is easy to buy or sell quickly because there are many active market participants. These liquid stocks typically have narrow differences between the buying and selling prices, known as the bid-ask spread. Conversely, low-volume assets have wider spreads and higher slippage risks. A trader might find it hard to exit a position in a low-volume asset without accepting a worse price.
Example
Imagine a publicly traded agriculture company called “Peanut Farms International”. On a normal trading day, investors buy and sell about 10,000 shares of the company. This 10,000 is the daily volume. One morning, a news report reveals that a large herd of roaming elephants has selected the farm’s peanut crops as their primary food source, causing a sudden spike in media interest. Investors rush to buy the stock because they expect higher future profits for the company based on the new agricultural demand. By the end of the day, 500,000 shares have traded hands. The daily volume for “Peanut Farms International” is now 500,000. This large increase in volume shows traders that the price jump has actual market participation behind it, rather than just a few isolated trades.