Turn the Volume Up to an 11
Dear Penny Stock Millionaire,
Listen up. As a trader, you should never rely on hunches or hot picks when you’re looking for stocks to trade. Instead, every trade should be the result of meticulous research and considering all sorts of variables.
I have certain criteria that I look for in every trade.
Stock volume is only a piece of the puzzle when you’re figuring out trades, but every piece counts. Along with further research, it can help you make smarter trading decisions.
If you don’t understand how volume works, what it means, or why it matters, you’re probably not making the most intelligent trades you possibly can. My advice? Stop trading until you grasp this basic concept.
Ready to learn how to use stock volume to improve your trading? Read on.
What Is Volume in the Stock Market?
Let’s start at the beginning. What is stock volume? Ready for this?
Volume is the number of shares traded for the day. That’s it.
The higher the volume, the more shares being traded.
Go back and read that again if you didn’t get it. Everything else here will build on that basic definition.
Is a Stock’s Trade Volume Important?
Now you know what a stock’s volume is. But why is it important?
For one, you’ve got to remember this: when you’re entering a trade, it’s not just you buying shares. It’s a market. For every buyer, there’s got to be a seller and vice versa.
When you make a trade, you want to easily enter and exit positions without rocking the boat.
The more shares in movement, the easier the transaction will go through. The market keeps flowing without hiccups. That’s the beauty of a high-volume stock.
With a low-volume stock, on the other hand, you might have to wait before your order’s filled … And your order alone could jolt the stock’s price. And not in a good way.
Volume can affect the stock’s price and how quickly and easily you can get in and out of a trade.
When you need to get out, you likely want to sell NOW. You don’t want your order to be like a red flag alerting other traders it’s time for the price to go up or down.
That’s just one reason why volume matters.
Volume can also tell you that something’s going on with a stock that could cause price movement. Let’s look at an example.
Volume in the Stock Market — Example
Say that you’ve got stock Z. It’s trading regularly with a volume of about 5 million shares. But suddenly, today it’s trading 20 million shares.
Could this be a sign that something’s going on with the stock? Absolutely. It’s a strong sign that something got traders excited about this stock.
That doesn’t mean you should drop everything and dive into a trade. It’s more of a sign to watch the stock and do more research.
Even if you’re too late to get in on the trading action, you can still learn from the stock’s price action.
I can’t stress this enough: don’t let FOMO ruin your trading. Even if you miss a trade, you can still learn from how a pattern plays out. Patterns constantly play out in the stock market, and a lot of them will likely repeat again. I like to say, history doesn’t often repeat itself, but it often rhymes. It might not be an exact repetition… but close enough.
What Does High Volume Mean in the Stock Market?
A lot of penny stock traders have a black-and-white mentality when it comes to volume … High volume GOOD. Low volume BAD.
But there’s a huge gray area.
Volume depends on the stock, so it’s relative. For example, a stock like Amazon (NASDAQ: AMZN), even on its most boring day, will have far more volume than a penny stock. But that doesn’t mean that it’s a better stock to trade.
If a stock is moving and experiencing massively increased volume, that’s worth looking at.
As a penny stock trader, you want volatility. Volatility is where the huge price swings happen that can potentially earn you profits.
You can’t really compete with the pros who trade large-cap stocks. They have more experience, more information, more resources, and more knowledge than you. Sorry.
But the pros don’t really care about penny stocks. That can create opportunities for traders like you and me.
How Does a Stock’s Volume Affect a Stock’s Price?
There’s a relationship between a stock’s volume and its price. But how does that work?
It’s not as simple as high volume equals higher price…
When a stock has high volume, it’s a sign that a lot of people are interested in the company. A lot of people are taking positions, whether long or short. Money’s flowing in and out of the company. Things are moving.
The more money that flows in and around a company, the higher the odds that the stock price could make a big price move — in either direction.
Volatility can be your friend… but also your foe.
When you’re on the right side of things, a big price move could potentially earn you more profits.
But if you’re on the wrong side, a big price move could make you lose big and fast. That’s why I always say you must follow rule #1: cut losses quickly. Don’t hold and hope.
Is High Volume Good for Stocks?
Once again, it’s not as easy as “high volume good, low volume bad.”
But there are some obvious benefits to high-volume stocks.
For one thing, stocks with high volume have greater liquidity than stocks with low volume.
Liquidity? What’s that?
Think about breakfast. You’ve got some toast and butter. If the butter’s cold and hard, it’s difficult to spread on the toast. But when you warm it up, it’s more liquid and spreads nice and smooth.
The stock market might not be a delicious buttery spread, but the general concept of liquidity is the same. It’s easier to move things around when there’s liquidity.
Liquidity is key to easy entry and exit from a trade. It’s also important because it keeps one individual order from moving a stock’s price too much.
With trading, you want to be like a ninja: quietly go in and leave without being noticed. You want to collect your profits and get out — no need for a big messy exit.
High volume can also give you a clue about a major catalyst that could move the stock’s price.
So if you see a distinct uptick in volume, look for news. Earnings winners, a big contract, Elon Musk smoking weed… It can all be connected to changes in stock volume.
But remember: volume is just one of many indicators. Don’t forget to do careful research and look for other indicators of a good trade.
What Does Low Stock Volume Mean?
Once again, low volume is relative. There are some stocks that will trade less than 10,000 shares a day… That can be dangerous territory.
The Bottom Line
I think a stock with 500,000 to 1 million shares is acceptable for trading … if the conditions are right. But it’s super important to be vigilant about the trade. You want to be able to get out fast if it starts moving against you.
Another word of warning? If a stock has low volume and suddenly has big news, it’s a big red flag. If there’s no real reason, it could be a stock pump. Don’t trade blindly. Don’t follow alerts. Always do your own research.
Editor, Penny Stock Millionaires