How THIS Type of Stock Can Improve Your Strategy
A stock’s trading volume is simple to understand by itself: it’s how many shares are traded on a daily basis.
But there’s way more to it than that.
The volume of some companies is always high, and others are almost always low. For instance, roughly 30 million shares of Apple are traded every day. Some penny stocks average only a few thousand shares traded daily.
What does that mean and why does it matter? This is one of the first things many of my students learn, and I’ll share it with you now.
Today, I’ll show you what high-volume stocks are and why they are important to pay attention to.
What are High-Volume Stocks?
Stock trading volume depends on the type of stock. On its slowest day, Apple is going to trade a lot more than any penny stock.
But that doesn’t make Apple a better stock to trade than penny stocks — not at all.
Lots of penny stock traders think high-volume stocks are automatically good and low-volume stocks are automatically bad. It’s not that simple. You have to look at the total situation.
If a stock’s volume is high because a surge in buying or selling is making the price move, that’s worth looking at. You want prices to move. Volatility can potentially trigger profit!
But if a stock’s volume is high just because it’s always high, then who cares? Let the high-frequency traders make their profits with Apple. You can’t compete with them.
How Can You Determine a Stock’s Volume?
All stock charts show the trading volume as well as the price.
For each day, look at the bottom, below the graph displaying the price history. You’ll see a vertical bar. The scale of the bar chart is on the right.
You can see at a glance just from looking at the height of the daily bars whether the volume is trending up or down. Most of the time it just bounces around randomly. Most charting tools allow you to set a moving average for volume. This will help you easily spot volume anomalies.
If you spot a sudden surge in volume after a period of low volume trading, that could indicate either a pump-and-dump operation or some kind of unusually good or bad news for this stock —and that could represent a trading opportunity.
Stock Volume Versus Dollar Volume
You can measure volume using the number of shares or by the dollars transacted.
The number of shares is the exact number of stock shares bought and sold that day.
However, you also want to look at the dollar volume involved because the stock of every company trades at a different price.
To find the dollar volume, simply multiply the number of shares bought and sold by the average price. Boom. Done.
For instance, if I tell you a company’s trading volume yesterday was 10 million shares, you might think that sounds like a high volume.
However, if the stock shares average only $0.01 per share, that’s only $100,000 in dollar volume, which is really small.
If a company’s stock is worth $10 and traders bought and sold one million shares, its trading volume is $10 million. That’s a lot larger than the first company.
Why Does Volume Matter?
When you trade a stock, you want to get in quickly, without your order affecting the price. That’s an argument for trading high-volume stocks. With low-volume stocks, you have to wait to be filled — and your order jacks up the price.
When you need to get out, you want to sell fast. You don’t want your order to signal other traders it’s time to raise their prices.
Changes in trading volume also tell you something’s going on, and indicate the stock price is moving. Traders don’t buy and sell in large volume without the stock’s market price surging or dropping, depending on whether fear or greed is dominant.
When a stock’s volume surges from 1 million to 10 million shares, that may indicate a situation you can take advantage of.
However, maintain your trading discipline. Look for the trading patterns and chart formations that work.
Lots of traders want to know: What is a good average volume in stocks?
For penny stocks, I find 15-20 million shares per day too high.
That said, 2,000 to 50,000 shares a day in buy and sell orders is just too low. Stay away from these traps! The market makers easily manipulate these stocks.
So looking at a stock’s volume is one factor that you should check out when you do your research.
Remember, avoid stocks with volume that’s too high or too low. Just look for stocks with a high volume that indicates price movement.
Benefits of Trading High Volume Stocks
When a stock is trading with high volume, that indicates a lot of people are interested in the company. Many people are taking positions, seeking to buy or sell at a profit. Money is flowing fast and furious.
The more money flowing into the markets around a particular company, the more likely the stock is likely to make a large price move — up, down or both. Volatility is your friend.
- When you’re on the right side of a trade, large price moves make you more money.
- When you’re on the wrong side, you can lose more money than usual, so it’s even more important to get out of losing trades fast.
Stocks with high volume are more liquid than stock with volume. That means it’s easier and faster to get your orders filled. You can buy or sell more shares of stock without your own orders pushing the stock’s price higher or lower.
And, when you’re ready to close out the trade, high volume and liquidity make it easier to buy or sell without your closing order pushing the market against you. Therefore, you keep more of the profit you made or lose less money getting out of a trade that went against you.
With high volume, it’s usually easy and fast to get your orders filled. Your order doesn’t drive the stock’s market price up or down, so you typically get filled at favorable prices.
High volume with a fast-moving share price can indicate a catalyst or news is at play. Look for earnings announcements, contracts with large companies, product launches, and press releases.
But volume is just one stock trading indicator. Look at the big picture. Do your research and stock analysis. Look for other indicators of a good trade.
If the high trading volume indicates a stock is breaking out or going through a trendline, consider making your play.
Maintain your discipline. Manage your risk. Don’t let one indicator fake you out.
The Bottom Line
As always, study and research can be the game-breaker in whether you have successful trades or a portfolio full of busts.
Understanding what high volume stocks are and the patterns you should look for to recognize them. Remember, volume should increase when a stock’s price makes large moves throughout the day.
High volume stocks are obvious evidence that a ton of people may be interested in a particularly hot company, which has many benefits for trading.
But what should you do when you come across these patterns in the market?
In tomorrow’s issue, we will discuss the steps needed to act on these types of trades and some different ways you can analyze all of this information correctly.
— Tim Sykes
Editor, Penny Stock Millionaires