A stock’s trading volume is simple to understand by itself: it’s how many shares are traded on a daily basis.
But there’s way more to it than that.
The volume of some companies is always high, and others are almost always low. For instance, roughly 30 million shares of Apple are traded every day. Some penny stocks average only a few thousand shares traded daily.
What does that mean and why does it matter? This is one of the first things my Trading Challenge students learn, and I’ll share it with you now.
Here, I’ll show you what high-volume stocks are all about and how you can track them down in a few steps.
Table of Contents
- 1 What are High-Volume Stocks?
- 2 How to Find High Volume Stocks in 3 Steps
- 3 Does High Volume Mean a Trade Is a Good Idea?
- 4 The Bottom Line
What are High-Volume Stocks?
Stock trading volume depends on the type of stock. On its slowest day, Apple is going to trade a lot more than any penny stock.
But that doesn’t make Apple a better stock to trade than penny stocks — not at all.
Lots of penny stock traders think high-volume stocks are automatically good and low-volume stocks are automatically bad. It’s not that simple. You have to look at the total situation.
If a stock’s volume is high because a surge in buying or selling is making the price move, that’s worth looking at. You want prices to move. Volatility can potentially trigger profit!
But if a stock’s volume is high just because it’s always high, then who cares? Let the high-frequency traders make their profits with Apple. You can’t compete with them.
How Can You Determine a Stock’s Volume?
All stock charts show the trading volume as well as the price.
For each day, look at the bottom, below the graph displaying the price history. You’ll see a vertical bar. The scale of the bar chart is on the right.
You can see at a glance just from looking at the height of the daily bars whether the volume is trending up or down. Most of the time it just bounces around randomly. Most charting tools allow you set a moving average for volume. This will help you easily spot volume anomalies.
If you spot a sudden surge in volume after a period of low volume trading, that could indicate either a pump-and-dump operation or some kind of unusually good or bad news for this stock —and that could represent a trading opportunity.
Stock Volume Versus Dollar Volume
You can measure volume using the number of shares or by the dollars transacted.
The number of shares is the exact number of stock shares bought and sold that day.
However, you also want to look at the dollar volume involved because the stock of every company trades at a different price.
To find the dollar volume, simply multiply the number of shares bought and sold by the average price. Boom. Done.
For instance, if I tell you a company’s trading volume yesterday was 10 million shares, you might think that sounds like a high volume.
However, if the stock shares average only $0.01 per share, that’s only $100,000 in dollar volume, which is really small.
If a company’s stock is worth $10 and traders bought and sold one million shares, its trading volume is $10 million. That’s a lot larger than the first company.
Why Does Volume Matter?
When you trade a stock, you want to get in quickly, without your order affecting the price. That’s an argument for trading high-volume stocks. With low-volume stocks, you have to wait to be filled — and your order jacks up the price.
When you need to get out, you want to sell fast. You don’t want your order to signal other traders it’s time to raise their prices.
Changes in trading volume also tell you something’s going on, and indicate the stock price is moving. Traders don’t buy and sell in large volume without the stock’s market price surging or dropping, depending on whether fear or greed is dominant.
When a stock’s volume surges from 1 million to 10 million shares, that may indicate a situation you can take advantage of.
However, maintain your trading discipline. Look for the trading patterns and chart formations that work.
Lots of traders want to know: What is a good average volume in stocks?
For penny stocks, I find 15-20 million shares per day too high.
That said, 2,000 to 50,000 shares a day in buy and sell orders is just too low. Stay away from these traps! The market makers easily manipulate these stocks.
So looking at a stock’s volume is one factor you should check out when you do your research.
Remember, avoid stocks with volume that’s too high or too low. Just look for stocks with a high volume that indicates price movement.
Benefits of Trading High Volume Stocks
When a stock is trading with high volume, that indicates a lot of people are interested in the company. Many people are taking positions, seeking to buy or sell at a profit. Money is flowing fast and furious.
The more money flowing into the markets around a particular company, the more likely the stock is likely to make a large price move — up, down or both. Volatility is your friend.
- When you’re on the right side of a trade, large price moves make you more money.
- When you’re on the wrong side, you can lose more money than usual, so it’s even more important to get out of losing trades fast.
Stocks with high volume are more liquid than stock with volume. That means it’s easier and faster to get your orders filled. You can buy or sell more shares of stock without your own orders pushing the stock’s price higher or lower.
And, when you’re ready to close out the trade, high volume and liquidity make it easier to buy or sell without your closing order pushing the market against you. Therefore, you keep more of the profit you made or lose less money getting out of a trade that went against you.
With high volume, it’s usually easy and fast to get your orders filled. Your order doesn’t drive the stock’s market price up or down, so you typically get filled at favorable prices.
High volume with a fast-moving share price can indicate a catalyst or news is at play. Look for earnings announcements, contracts with large companies, product launches, and press releases.
But volume is just one stock trading indicator. Look at the big picture. Do your research and stock analysis. Look for other indicators of a good trade.
If the high trading volume indicates a stock is breaking out or going through a trendline, consider making your play.
Maintain your discipline. Manage your risk. Don’t let one indicator fake you out!
How to Find High Volume Stocks in 3 Steps
Here’s an efficient three-step plan you can use when you’re hunting for high volume stocks …
- Look for the high volume penny stocks that have gone up the most since yesterday’s closing price.
Price movement is more important than trading volume. And stocks that have surged in one day have almost certainly had a corresponding rise in trading volume. If they don’t, you may want to avoid them.
Stocks that are up big should have high volume pushing the stock higher. If a stock is up 5% on below-average volume, it could be a trap set by the market makers to get rookie traders into bad positions.
Remember that volume validates the price movement. A large increase in a stock price MUST be accompanied by an equally large increase in volume.
- Look at the Internet message boards.
Yes, seriously. I’m looking for news that checks out and for companies that are being hyped. Don’t ever believe people on these sites until you’ve done your own research. Assume they have a hidden agenda.
Go in with eyes wide open and your hand holding tight to your wallet. If somebody’s pushing a small stock higher, maybe you can hitch a ride — just don’t believe you’ve found the next Apple.
- Use a software platform with killer scanning tools.
My favorite is StocksToTrade. I’ll tell you why in a few minutes when we get more into detail on software.
The good thing is, there are plenty of penny stocks with high trading volumes. You need to analyze the opportunities so you find the ones worth trading. The right software can help you find them.
Technical and Fundamental Analysis
Fundamental analysis is the process of researching a stock based on the fundamental value of the company.
That is, you look at such factors as what sector the company’s in, whether the company is one of the sector’s leaders or laggards, whether it’s making or losing money, and a hundred other factors.
Fundamental analysis is what Warren Buffett does, and it works great if you can convince a few hundred or thousand people to let you manage their money, like he did. If he spent his life investing just his own money (like most of us do), he’d probably be richer than average but he wouldn’t be a mega-billionaire.
And he would have had to work a day job until he was 40 or 50 or so. No thanks. Next!
Technical analysis means studying the stock’s chart indicators. The most important is obviously its current market price. And the chart shows you the past price moves. You can see at a glance whether it’s been going up or down, or just floating sideways.
The record of a stock’s past price movements creates recognizable patterns. These indicate the collective emotions of the market toward the stock and how traders have been buying and selling in reaction.
Those patterns tell a story about the stock’s past, and can help predict its future. The price action normally forms a trend line that’s headed either up or down. If a stock breaks through a trend line, that’s significant.
Looking at a chart is essential for determining whether the stock’s trading volume is high or not. And it contains lots more information.
Markets are a form of crowdsourcing, and technical analysis is how you read what the masses of other traders and investors are saying about a stock and its future.
Clearly, researching, studying, and analyzing stocks includes crunching a lot of numbers, and computers are a lot better at that than people.
While software can bring up company information and news, you’re ultimately responsible for deciding whether that makes a company a good opportunity.
Yes, software can draw trend lines and calculate moving averages, but YOU have to determine what the indicators are saying about the potential trade.
- Is this stock a good trading opportunity or not?
- What do all the patterns and numbers actually mean?
- Is volume where we want it or is it a possible fake-out?
I’ve used many trading platforms over the years, but couldn’t find one that had everything I needed to carry out my trading as quickly and as conveniently as I wanted to …
… So I stepped up and did it myself (along with an incredible team of colleagues).
StocksToTrade the trading platform that — finally — does everything I ever need.
No longer do you need to visit 10-15 websites to keep up with all the most in-play stocks! With StocksToTrade you get charting, news feeds, quotes, watch lists and more, all within a highly user-friendly piece of software.
It gives me all the information I use in my own trading — and does it quickly and easily. My TV remote control is harder to use.
Stick to Your Indicators and Favorite Patterns
There must be a hundred or more trading patterns and indicators. Maybe a thousand.
Do you have to learn and master all of them to potentially make money trading penny stocks?
You need to know how to read a chart. You need to know the basics of trends and trend lines, volume, and moving averages.
Learn some patterns and indicators that work well for you, and stick with them.
When you trade, focus on what works for you.
Bonus Tip: Knowledge Supports Growth
You should never stop learning. Markets change. Economies change.
The day you believe you know it all, that’s when somebody will figure out how to eat your lunch … and your breakfast, dinner, and midnight snack. Don’t let this happen to you!
Back when I started my trading career, I didn’t have any resources to learn from or mentors to help guide me. It was ROUGH. I made a ton of mistakes and lost a bunch of money.
I started my Trading Challenge to give traders today what I didn’t have — I want to help them avoid the early mistakes that can completely destroy their trading accounts.
Through the Trading Challenge, you can get access to all my resources, trades, commentaries, webinars, and more. Plus, you’ll get the chance to learn from my top students. It’s the ultimate way to communicate with other traders, get tips, share your plays, and learn from others’ successes and failures.
If you’re serious about learning to make smart trades for yourself, then I invite you to apply for the Challenge.
Does High Volume Mean a Trade Is a Good Idea?
High trading volume is one factor to consider when you’re making a trade — but it’s not remotely the only factor.
Look at the big picture. Has there been some important news about the company? Sometimes, this makes a huge difference.
If a stock’s trading volume is high just because it’s always high, but the price isn’t trending or breaking out, forget it.
High volume is good for confirming breakouts are real, and the price will continue to surge.
Look for your indicators and chart patterns, then see if a high volume confirms the breakout!
Becoming More Confident About Trading High Volume Stocks
As you’ve learned, a stock having a high volume of trades is a good thing, but that, alone, isn’t a sign of a sure thing. That’s a common beginner’s mistake.
As you study and practice trading, you’ll become more confident about trading stocks.
You’ll get more adept at spotting breakouts and the chart patterns that tell you when a stock is about to smash through a point of resistance .
A higher-than-normal volume can also tell you when a signal is valid. It means a lot of other traders are getting in on the action because they want a piece of it.
The big takeaway: Don’t trade stocks with a low volume of 50,000 shares or less.
What About Low Volume Stocks?
A stock with a volume of around 500,000–1 million shares is all right to trade up to around a few thousand shares. Just make sure you stay on top of it so you get out fast if the price starts to move against you.
If there’s big news about a stock with a low volume, that’s a red flag. It could mean someone is attempting to run a pump and dump scheme with it. Don’t get dumped on!
Always Avoid Stocks That Are Too Illiquid for Any Trade
Illiquidity is the main problem with low volume stocks. When you buy, your own order raises the price you pay.
When you want to sell, nobody wants to take your order. You can lose a bundle just trying to run for the exit.
Stay away from all stocks trading at 50,000 shares a day or less, period.
The Bottom Line
Congrats — you made it to the end of the lesson! Now I’ll wrap this all up in a nice, tidy package for you …
- Avoid all stocks that have low liquidity.
- Do not trade high volume stocks just because they have a high volume. Look for chart patterns and other indicators that signal a good trade setup.
- Volume should go up when a stock’s price makes large moves in a day. Use high volume as a way of confirming the price action. It supports the breakout from the trend line or resistance level.
- If a stock’s price jumps or falls a lot without a corresponding surge in trading volume, that’s a red flag.
- A spike in trading volume should also accompany news like an earnings surprise or product launch.
- You can find stocks to trade by looking for those with large percentage increases in trading volume. That could indicate a major surge in demand for the stock, and, therefore, a large movement in price. Happy hunting!
How have you used volume in your technical analysis? What have you learned by trading based on volume analysis? I want to hear about it — so share your comments!