Trading volume represents the total amount of securities that have been traded between buyers and sellers over a specific time period. Investors and analysts look at the trading volume to evaluate the market's activity and liquidity.
Trading volume is a technical indicator that gauges general market activity. The idea behind measuring trading volume is to use generated values to make an informed decision about either buying or selling a stock.
This technical indicator is often used by traders to confirm if an ongoing trend is close to reversing, or continuing. High volume values tend to be associated with reversals, hence investors are using it as a signal to help them decide whether to enter the market or not. Similarly, investors with open positions will use trading volumes to decide whether to take profits or remain in the trade.
Market breakouts also tend to be associated with higher trading volume. A breakout that comes in hand with low volume signals low market confidence in the breakout. Similarly, a breakout with a high volume is generally believed to be more significant as it shows the “smart money” are behind the rally.
Trading volume is best used in conjunction with other technical indicators that can help traders decide if the market is reversing or continuing in the same direction.
Go back to our full glossary.