The secret to success in intraday trading lies in the trader’s ability to weigh the stats. One metric that the day trader studies closely is intraday volume. This denotes the number of units of stocks or futures that have been bought or sold during a specific period.
Among the common intraday tips offered to newbie traders is to keep an eye on the volumes traded. But reading intraday volumes is not all that easy.
You will find that the markets are very busy during the opening and closing hours. Lots of stock units change hands, and a huge proportion of the day’s bookings happen at these times. News events and overnight market sentiment drive trades in the opening hour. Many traders also take positions early on using analysis from the close of the previous day.
After a brief lull during lunch, the action builds up again until the closing hour. This time around, you have traders closing their positions for the day or trying to cash in on potentially lucrative trades.
The challenge for the intraday trader is to gauge how a stock’s volumes will move through the day. How can you do that? Here are some intraday tips to help.
Intraday Tips for Reading Volume Data
While getting the right read on intraday volume can be complex, the following intraday tips should help you get a grasp on things.
#1. Know How Intraday Volume is Depicted on Charts
In most stock price charts, volume is plotted along the Y-axis and time on the X-axis. The volume traded within the specified time interval is depicted at the base using vertical bars.
In a one-minute chart, for example, each bar represents the volume of units bought or sold within a one-minute period. Some stock price charts use colour to signify price movements. A red vertical bar signals a price decline, whereas a green bar points to a rise in the stock price.
#2. Understand Buy and Sell Volume
Intraday traders look for stocks with high volume, and with good reason. High volume signifies that other traders are interested in the stock. Should you wish to trade, finding a seller or buyer will be simpler.
But is it a buyer’s or a seller’s market? If the stock price is rising, that means buyers are in control. The offer price is the lowest at which the seller is willing to sell. If you purchase the stock, it demonstrates demand and buying volume.
On the other hand, sellers have the upper hand if the price drops. Sell volume occurs at the bid price, which is the highest a buyer will pay. It indicates that the seller does not want the stock.
#3. Compare Intraday Volume to Average Daily Volume
How do you pin down the implications of volume? Among the standard intraday tips is to work in a pre-selected average daily volume. Your charting package should provide the average daily volume—often the 50-day simple moving average.
But you could also do the calculation manually: Simply add up the daily volumes for the period and divide this sum by the number of days. Focus on digging out patterns rather than looking for precision.
#4. Take Advantage of Quote Sheets
To get a comprehensive picture of multiple key stocks, enter the average volume beside the real-time volume on a quote sheet. The totals of the average daily volume can also be inserted into volume histograms for easy comparison.
At the end of the opening hour, identify securities that have already surpassed one-third their average daily volume. The assumption is that around 75% of the day’s volumes will be traded in the opening hour, the closing hour, and the final minutes till market close.
If the stock maintains this run rate through midday, expect the day’s volume to exceed the daily average for the rest of the trading day.
#5. Look for Key Intraday Volume Indicators
- Is volume increasing along with price? That means buyers are eager to pick up the stock.
- Is the volume declining as price goes up? There are fewer buyers for this stock, which may be pushing up the price.
- How can you tell if a trend is likely to persist? The trend may continue if the volume is larger when the price is trending and smaller when the price moves contrary to the trend. If the volume is high along with sharp price shifts against the trend, the trend may be weakening or a reversal may be on the cards.
Sum Up – How to Read Intraday Volumes
Intraday volume can help you get a read on how the mass of traders is reacting to market movements. As a thumb rule, you want to go where the crowds are, but only with thorough analysis can you make the appropriate trading decisions.
Volume can certainly assist you to identify lucrative intraday stocks. And that’s not all. By looking into intraday volume data, you can set effective stop losses and profit targets.
But don’t depend on volume data alone. Add price movements to your analysis too. It would help to open an account with a quality broker that offers advanced charting tools, intraday tips, and various other resources.
Remember, when day trading in the stock markets, a thorough analysis can help you make worthwhile trades.