High, Low, and Relative Volume
High volume is an indication that a market is actively traded, and low volume is an indication that a market is less actively traded. Some assets tend always to have high volume, as they are popular among day traders and investors. Other assets tend always to have low volume and aren’t of particular interest to short-term traders. There is also “relative” volume. For example, when a stock typically has high volume but volume drops off, it indicates that traders are losing interest in the asset, at least temporarily. Similarly, when an asset with typically lower volume sees higher volume, that indicates new interest and activity in it. Volume is often shown along the bottom of an asset’s price chart. It is usually depicted as a vertical bar, representing the number of contracts, shares, or lots traded during the time frame shown on the chart. For example, if you’re viewing a one-minute price chart for a futures contract, there would be a vertical volume bar below each price bar, showing how many contracts changed hands in that single minute.
Buying and Selling Volume
Total volume is made up of buying volume and selling volume. Buying volume is the number of shares, contracts, or lots that were associated with buying trades, and selling volume is the number associated with selling trades. This concept is often confusing for new traders because every trade requires both a buyer and a seller of the given asset. However, you can distinguish buying volume from selling volume based on whether a transaction occurs at the bid price or the ask price.
Bid and Ask Volume
The bid price is the highest current price that someone is stating they will pay for an asset. The ask price is the lowest offered price at which someone is willing to sell the asset. There is always a bid price and an ask price in an actively traded asset. The bid and ask prices fluctuate as traders buy and sell the asset or change their minds about their current bid or offer. When you decide to buy or sell, you have three options:
Put out a bid to buy, or an offer to sellBuy instantly from someone posting an offerSell instantly to someone posting a bid
When a transaction occurs at the bid price, the number of assets changing hands contributes to the bid volume. Bid volume is selling volume because it has the potential to move the price down. Suppose a trader is bidding 100 shares at $10.01, and a different trader is bidding 100 shares at $10.02. When yet another trader sells the 100 shares to the second trader at $10.02, that bid will disappear, and the new bid will be the lower price of $10.01. The selling volume at the bid lowered the price. When a transaction occurs at the ask price, the number of assets changing hands contributes to the ask volume. Suppose a trader is offering 100 shares at $10.01, and another trader is offering 100 shares at $10.02. When yet another trader buys the 100 shares at $10.01, that offer will disappear, and the new offer will be the higher price, $10.02. The buying volume at the offer pushed up the price.
More Buyers or Sellers
When a market is experiencing more buying volume than selling volume, it means there are more traders buying at the ask price, which has a tendency to push the price up. When a market is experiencing more selling volume than buying volume, it means there are more traders selling at the bid price, which has a tendency to push the price down. The relative number of buyers and sellers can change at any moment and, in fact, often changes many times, even in short time frames. That’s what causes the markets to move in upward and downward trends rather than only in one direction.
Trading Based on Volume
Changes in volume—and identifying whether more transactions are occurring at the bid or offer price—give traders short-term indications of where the price might go next. Unfortunately, the numbers of people buying and selling—and the prices they’re buying and selling at—are in constant flux. Therefore, volume can tell you a lot about a particular market, but it is just one tool and shouldn’t be solely relied on to make trading decisions.
