Stock volume is the number of buy and sell transactions that take place over a given period of time. Popular companies, such as Apple Computers, see more than 10 million shares exchange hands every day, while some small companies may only have a couple of hundred shares trade. Stock volume is an important indicator as it represents liquidity. Stocks, like Apple, are highly liquid, meaning you can buy and sell easily and quickly.
Volume By Price Indicator
A stock volume indicator is usually placed below the price area of a stock chart. The volume by price indicator plots volume in red bars and black bars. If the price of a stock closes higher than the previous day's close, the volume bar will be black, representing buying volume, or up volume. If the price of the stock closes lower than the previous day's close, the bar will be red, representing down volume.
Stock chart readers use volume in various ways to determine the future direction of a stock price. When combined with the price, volume can provide important clues. For example, if a stock price is rising but volume is decreasing, it indicates that prices are rising on decreasing demand. This can indicate the price rise is unsustainable and that prices may fall lower in the near future.
When stock prices are falling and volume is increasing, it tells you that selling is heavy and lower price levels are likely to continue for the foreseeable future. Contrarily, if prices are falling but volume is decreasing, it indicates that fewer investors are willing to sell and that the price may turn higher in the near future.
Unusual volume is one of the most important clues for chart readers. Volume sometimes spikes dramatically when a stock price is ready to reverse. For example, if a stock has been rising for a period of time and volume suddenly doubles or triples compared to average volume levels, it may indicate that institutions, such as banks, are selling. A volume spike after an extended uptrend is a warning sign that the price may soon reverse lower.
Donald Harder has been writing financial-related articles since 2000 when he founded the firm Securities Research Services. He has worked as a speech writer for the U.S. Department of Justice and written white papers and studies for the U.S. Department of Housing and Urban Development. Harder holds a Master of Arts in international affairs from George Washington University.