On a daily basis, a staggering number of stocks are bought and sold in marketplaces around the world. As a general rule, a high trading volume is a relatively strong indicator that the market is healthy and that traders are actively interested in the assets being bought and sold. Likewise, when trading volume dips significantly lower, it is a valuable indicator that traders may be moving on to different assets for a variety of reasons. Developing a clear method for interpreting and distinguishing between sell and buy volumes can help you make strategic, smart decisions when it comes to your own investment plans.
Interpreting Buy Volume
The term "buy volume" often is used interchangeably with the words "ask volume." When a seller offers a given number of shares at a specific price, it is up to the buyer whether he will accept the price that the seller is asking for it; that's why it's called an "ask volume."
In many situations, a disproportionate number of buyers can result in the price of a stock rising quickly. As the trading volume increases, this is usually a good indicator that the price per share will continue to rise over the short term.
There is, of course, no definitive prediction that can be used to accurately explain all price movements of a stock. With that in mind, investors should engage in the practice of DYOR, or "Do Your Own Research," to determine what the next action should be with regard to their trades.
Interpreting Sell Volume
The term "sell volume" is directly connected to the phrase "bid volume." When a given stock has a higher selling volume than buy volume, the most common price behavior to follow would be a downward motion. This is because a large number of traders are willing to sell their stock at the current bid price to offload their stock as fast as possible. As the overall trading volume decreases, it is quite likely that prices will fall more rapidly if sell volume still outweighs buy volume, given the fact that individual trades can reduce the price when fewer buyers are propping up the buy volume.
A low trading volume can induce volatility that both positively and negatively affects current pricing. This is due in large part to a lack of liquidity, or the ability to quickly divest of your holdings in the event of unfavorable pricing action. With that in mind, traders should not only keep in mind the current levels of buy and sell volume but also the overall trading volume, as this will equally affect their holdings.
Video of the Day
- $ Symbol and bar chart image by rolffimages from Fotolia.com