What is Trading Volume and How Does it Work

Trading Volume

In finance, trading volume, or simply volume, is the number of shares or contracts traded in a security or other financial instrument within a given period of time.

Volume is a popular metric in technical analysis as it is used to measure the worth of a market move. If the markets make a strong move either up or down the perceived value of that move is usually measured by how much volume accompanies it. When price and volume rise together, it is considered a bullish sign, and when they fall together, it is considered a bearish sign.

Trading volume can be compared between securities, but may also be analyzed over periods of time to identify trends. For example, if Company A’s stock trades 100,000 shares per day and Company B’s stock trades 1,000,000 shares per day, it would be said that Company B has higher trading volume than Company A.

However, if Company A’s stock consistently trades 100,000 shares per day but Company B’s stock only traded 1,000,000 shares total for the entire month, it would be said that Company A has higher average daily trading volume than Company B.

There are a variety of benefits to using volume when analyzing securities. First, it can be used as a leading indicator to predict price movements.

Second, it can help confirm price movements by increasing the reliability of technical analysis patterns such as breakouts and reversals.

Finally, high volume often accompanies important market events such as earnings announcements or major economic releases, which can help traders make better-informed decisions.

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