Can You Tell the Direction of the Stock Price by Looking at the Bid vs. the Ask Volume?

The bid-to-ask volume can help you determine the way a stock price will head. Market participants leave behind footprints in the form of reported transactions. Analyzing the reported trades can tell you a lot about their action and its traders' state of mind -- and its probable influence on the direction of the stock price.

Reported Trades

Stocks are quoted "bid" and "ask" rates. Bid is the highest price at which you can sell; ask is the lowest price at which you can buy. For example, if XYZ is quoted $37.25 bid, $37.40 ask: the highest price at which you can sell is $37.25; the lowest price at which you can buy is $37.40. When a trade takes place on the bid, somebody is selling; when it takes place on the ask – somebody is buying.

Volume

Volume is the number of shares traded. Multiplied by the current stock price, it tells you a transaction's dollar amount. The higher the volume, the more important the action is because it shows you how much money changes hands at a specific price level. For example, if eight 100-share XYZ trades are reported on the bid – at $37.25 and two 1,000-share XYZ trades are reported on the ask – at $37.40, the total bid volume was 800 shares, and the total ask volume was 2,000 shares.

Trading Psychology

Traders always want to get a better price: Instead of accepting the current bid and ask, they may try to sell a little higher or buy a little lower. In an orderly market, you may see trades reported between the current bid and ask; for example, $37.28 or $37.35. But when traders are anxious to buy or sell, they are willing to accept whatever prices they can get, so when you see trades being reported on the bid or on the ask, you know the price is likely to move.

Price Trend

When the bid volume is higher than the ask volume, the selling is stronger, and the price is likely to move lower. When the ask volume is higher than the bid volume, the buying is stronger, and the price is likely to move higher.

Institutional Action

Institutions account for most of the trading in larger stocks, so their action usually has the most influence on the stock price. Institutional buying can push a stock price higher; institutional selling can push a stock price lower. Institutional transactions are large. When you see eight 100-share XYZ trades at $37.25 and two 1,000-share trades at $37.40, you know institutional buying is going on in XYZ -- an additional factor that can push the price higher.

References (2)

  • Tape Reading and Market Tactics; Humphrey Neill
  • The Boston Institute of Finance Stockbroker Course: Series 7 and 63

About the Author

Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.

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