Table of Contents
What is Volume of Trade?
The volume of trade, also known as trading volume, mentions the number of shares or contracts that fit given security traded daily.
In other words, the trading volume provides a measure of the number of transactions transacted between a given passé.
Trade volume is a pointer of the market activity and liquidity of a given security, e.g., stocks, bonds, futures contracts, options contracts, and all diversities of commodities.
It indicates that the market is highly active, making it easy for buyers and sellers to communicate and execute contacts. Similarly, when a security trade less actively, its trade volume is said to below.
How is the Volume of Trade Expressed?
- Every market exchange tracks its trading capacity and provides volume data.
- The volume of trade numbers may report as frequently as once every hour throughout one trading day.
- Trade volumes that report on an hourly basis are estimates.
- Similarly, the volume of trade reported at the end of a trading day is also an estimate. The actual figures are not made available until the following day.
Examples of Volume of Trade
- Consider a market that is composed of two traders. The first trader, X, buying 100 shares of stock Alpha and sells 50 shares of stock Beta.
- The second trader, Y, buys 200 shares and sells 100 shares of the similar stock, Gamma, to X.
- In such a situation, the total trading volume in the market would be 350.
- This is because 100 shares of Alpha trade, 50 shares of Beta trade, and 200 shares of Gamma trade.
Trading for Volume of Trader
- When there is uncertainty over the market’s future direction amongst investors, the trading volume of futures contracts tends to rise.
- As a result, choices and futures trading becomes more active.
- Several significant drivers of the upsurge in trading volume statistics in markets, particularly in the US, include high-frequency traders and index funds.
- Such passive investors utilize high-frequency algorithmic trading, which contributes to overall trading volumes in stock markets.
- Real traders, who transact in the market based on their evaluations and expectations of market actions, only make up 10% of the total volume in US markets.
- The traders utilize trading volume as one of the factors used in their technical analysis while seeing market trades.
- It proves to be a handy yet simple tool in the situation of large price jumps or drops.
- In cases of a drastic price increase, a high trade volume can act as a catalyst.
- When a high trading volume associate with such changes, faith in the actual value of the security tends to get reinforced.
- Trade volume is also an essential factor for traders when they are making trading decisions.
- They track a security’s regular trading volume daily over a short term or even a longer-term period for the same.
- Usually, trading volumes tend to increase towards the beginning and end of a trading day.
- The same thing happens on Mondays and Fridays as they mark the beginning and end of the trading week.
- The rules and regulations regarding the usage of trade volume by financial markets traders set in the US by the Securities and Exchange Commission (SEC).
- In the United Kingdom, the Financial Conduct Authority (FCA) achieves the function.
Surrogates for Volume of Trade
- Investors can also track the tick volume of a security, which means the number of changes in a contract price.
- It is because as it increases, price changes also tend to become more recurrent.
- Similarly, the dollar value, which regulates the total value of the shares that change hands over a specific time, can control the liquidity status.
The volume of trade, also known as trading volume, refers to the number of shares or contracts that belong to given security traded daily.
Trade volume says to be high when given security trade more actively and vice versa. A higher is typical of better instruction execution and higher liquidity.