Investors are always in search of stocks that have the potential for substantial price movements. While looking for such stocks it can pay well to go with the crowds. This is because stocks will see a significant price movement, if a large number of traders get interested in the same stock.
Looking at the unexpected trading volume for the stocks can identify such a trend.
Volume, in general, refers to the number of shares of a security traded in a given period. Most commonly, trading volume is measured daily. For instance, if the daily volume number for IBM is 10,000,000, it means that during the trading day 10,000,000 shares of IBM changed hands (bought/sold).
Trading volume gives us a lot of insight about the market support available for a particular price movement:
- Volume is increasing and prices are increasing: This means that people are supporting the price movement. There is a high likelihood of this up trend continuing.
- Volume is decreasing and price is increasing: This means that people are not supporting the price movement. There is a low likelihood of this up trend continuing.
- Volume is increasing and prices are decreasing: This means that people are supporting the price movement. There is a high likelihood of this down trend continuing.
- Volume is decreasing and prices are decreasing: This means that people are not supporting the price movement. There is a low likelihood of this down trend continuing.
You will notice that irrespective of the price movement, the increasing volume tells us that the given price movement is getting a lot of support.
So, when you see stocks with unexpected volume, you can make use of that information and place new trades or manage your existing trades.
For instance, assume that you see a huge increase in trading volume for Apple stocks and the price of Apple stocks increases significantly. At this time, you may consider buying Apple because the trading volume suggests that the current price movement has good support and will most likely continue in the future.
On the other hand, assume that you own IBM. You see that there is a huge spike in volume, and the price of IBM has dropped. This suggests that there is a lot of support for this downtrend. At this time, you may consider selling your position in IBM, or at least place a stop-loss order to protect your position.
Often, novice investors will say that when volume is high and the price is going up, then there are more buyers in the market. On the other hand when volume is high and the price of the stock is going down, than there are more sellers in the market.
This is not true.
In the stock market, there are always equal number of buyers and sellers. For every stock that is sold, there is a buyer on the other side.
Instead of saying that the buyers or sellers are more, it is more correct to say that the price at which buyers and sellers are agreeing to trade is moving up or down.