High Volume Stocks
What are high volume stocks? And what causes it? See today’s video lesson here and get in my weekly webinars for ALL the details..
As a new trader, you’ve probably heard the term “volume” tossed around in conversation and your educational materials. But do you actually have a grasp on what it means in the stock market, and why it matters?
On the one hand, the idea of high volume stocks is fairly simple. These are stocks characterized by plenty of movement. However, understanding what that means in terms of trading can get a bit more complicated.
Here, I’ll break down what you need to know about high volume stocks so that you can understand them better, and improve your trading and general knowledge base.
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What are high volume stocks?
A stock’s so-called volume can be determined pretty simply: by the amount of shares traded during the course of a day. This is both in terms of buy and sell orders. The higher the amount of activity in either direction, the higher the volume of a given stock. So, a high volume stock is one that is being traded in large amounts. Really, it’s as simple as that.
How can you determine a stock’s volume?
While it is possible to figure out a stock’s volume by yourself, many traders find that it’s much easier to determine this by evaluating stock charts, where they can compare and contrast the volume of several stocks at one time.
Stock volume versus dollar volume
A common misconception about stock volume is that it has to do with the dollar amount of the stock. Dollar volume is something different, which is calculated by combining a given stock’s share price with its daily volume…a 25 cent/share stock that trades 10 million shares traded on the day just $2.5 million worth of stock that day vs. a $10/share stock that trades 10 million shares in a day has traded $100 million worth of stock that day…get it?
Why does volume matter?
High or low volume in a stock can help inform you about whether or not a trade is a good move for you. For example, if you see that a stock is trading with high volume, this could be a good sign that it is a good pick, or at least it’s actively traded among the day trading mob. Basically, the idea is that when there is more movement around a stock, the demand is higher. This is one of the big reasons why many traders will carefully evaluate a stock’s movement as part of their research before buying a stock.
Does high volume mean a trade is a good idea?
As referenced above, a stock’s volume should be part of your research as a trader. However, it’s a common trading mistake to only look at volume. Really, by doing this you are only getting part of the story….be sure to use ALL the indicators in this free stock trading guide.
Truthfully, you can never know for sure if a stock will perform how you would like. That’s simply the inherent nature of the stock market. Trading penny stocks comes with an inherent level of risk. However, it’s this risk that can ultimately deliver rewards. I want to help my students in the Tim Sykes Millionaire Challenge to make decisions in the best way possible.
As a trader, the best thing that you can do is study and do your homework; being responsible like this can help you mitigate risk in trading. By doing research on the company in question, you can begin looking for potential catalysts, news releases, product launches, or other factors that might affect the stock’s performance. You may also want to look at the history of how that stock or similar ones have performed in the past, because after all, history repeats itself. Combining this research with evaluating stock charts for volume can help you make the most educated decision about a trade.
Becoming more confident about trading high volume stocks
In reading the above, it’s possible that you started to feel confused about trading high volume stocks. That’s understandable, because this isn’t the simplest thing in the world. It requires a lot of effort and research.
However, this is something that becomes easier over time as you develop good trading habits. I try to instill good study habits in my students in the Tim Sykes Million Challenge team, because I know that over time, this will help improve their performance. Things like reading charts may not become like second nature to everyone, but it does get easier and more understandable over time. Be sure to give yourself time and space to improve, and don’t expect miracles overnight.
What about low volume stocks?
Many traders think it goes like this: high volume stocks are good, and low volume stocks are bad. It’s not necessarily so black and white. While yes, high volume can be a better indicator that a stock is on the move, this movement may be attracting many other traders too and that creates choppy stock prices so I actually prefer staying away from stocks that trade over 15-20 million shares in a day as I usually get faked out by all the choppiness.
Low volume stocks can often raise red flags, and if they are being hyped, it could be the result of a so-called pump and dump scheme. However, this isn’t always the case. If your position is just a few hundred shares or a few thousand shares it’s fine to trade a stock with 500,000-1 million shares traded on the day, just beware if the stock starts going against you as it could move fast so you must ALWAYS comply with penny stock rule #1 here.
ALWAYS AVOID STOCKS THAT ONLY TRADE 2,000-50,000 SHARES ON THE DAY, THEY’RE JUST TOO ILLIQUID FOR ANY TRADE
Ultimately, the things listed above, including research, evaluating charts, and looking at the history of a particular stock should be factors that inform a trade rather than volume alone.
As you can see from this post, the idea of a high volume stock is fairly simple. However, this doesn’t mean that the decision to trade them is necessarily easy. A stock’s volume should be a factor in deciding whether or not to make a trade, but not the only factor. Ultimately, you must do research and take the time to consider various factors. This is how you can begin to mitigate risk in your trading and make good decisions!
Do you consider a stock’s volume when trading? Be honest with me and leave a comment below, let’s see what you think about trading volume!