Stocks can experience high volumes during the day depending on news specific to a company or news about the economy as a whole. In the first instance, profit reports from a company can lead to more people buying into or selling out of a stock. In the second, poor economic reports can make global investors reallocate their investments. In both cases, the dramatic effect of such events can cause volumes to push on a stock’s price. Therefore, traders usually pay attention to how volumes affect prices to achieve better results.
Limit Order Types
Limit orders are often used as a conservative approach when trading stocks during high volume days. A trader can control the price range at which he receives an execution fill and thus not be affected by what happens when high volume trading makes a stock’s price volatile. For instance, a direct market order entered to buy a stock at any prevailing price can cause the trader to get an execution at a high price; by using a limit order, a trader sets the price range at which he can receive an execution fill.
Spread out the Order
Dividing up the order is another way traders navigate high volume days to achieve good executions. For example, if a trader was interested in buying 10,000 shares of a stock during the day, she is most likely to divide up the order into chunks of 1,000 shares so she doesn't drive up the stock’s price in the process. If she doesn't, the full volume associated with the order can cause the trader to add pressure on the stock’s price and jeopardize her execution quality. Some shares would be bought at higher prices, which will increase the overall average price of the trade order.
Use Weighted Averages
The volume weighted average price is another way of dividing up your order. Here, the trader is dividing up an order in line with volume. For example, an order to buy 10,000 shares of stock would be spilt up into chunks that instead represent a fixed percentage of the current volume trading in the market. In effect, for example, 40 percent of your order could be completed earlier in the day and the other 60 percent toward the close when volumes are higher in the stock market.
Algorithms are automated trading strategies used by traders to achieve effective routing options and better price executions. Volume weighted average price, for example, has been incorporated into many trading applications as one such automated trading strategies. Financial firms and private companies invest in these complex algorithms and incorporate various types of limit price orders, volume based orders and passive or aggressive styles that ensure a trader is effectively working an order during high volume days.
Victor Rogers is a professional business writer who started his career as a financial analyst on Wall Street. He later expanded his experience to content marketing for technology firms in New York City. Victor is an alumnus of St. Lawrence University, where he graduated with honors in economics and mathematics.