{"id":5591,"date":"2024-02-08T11:38:06","date_gmt":"2024-02-08T11:38:06","guid":{"rendered":"https:\/\/economicherald.net\/?p=5591"},"modified":"2024-02-08T11:38:06","modified_gmt":"2024-02-08T11:38:06","slug":"why-knowing-trading-volume-is-important-and-how-to-use-it-as-an-entry-or-exit-signal","status":"publish","type":"post","link":"https:\/\/economicherald.net\/?p=5591","title":{"rendered":"Why knowing trading volume is important, and how to use it as an entry or exit signal"},"content":{"rendered":"

The ASX releases top 20 stocks by volume on a daily basis
\nWhy is volume data important for investors?
\nAnd how do chartists interpret trading volumes?<\/p>\n

\u00a0<\/p>\n

The ASX releases<\/a> a top 20 trading volume list on a daily basis.<\/p>\n

Here\u2019s one for the 6th February, showing that Mako (ASX:MKG)<\/a><\/strong> and 88 Energy (ASX:88E)<\/a><\/strong> were the top traded stocks on the day:<\/p>\n

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Source: ASX<\/strong><\/em><\/p>\n

\u00a0<\/p>\n

So why is this data important for investors?<\/strong><\/p>\n

First, a bit of definition. Volume is the amount of stocks that changes hands over some period of time, usually one day. A transaction (consisting of a simultaneous buy and sell) is counted as 1 trade volume.<\/p>\n

The trading volume of a stock, or lack of it (particularly when it\u2019s monitored over a period of time) can tell you some very important things about a stock:<\/p>\n

\u00a0<\/p>\n

Liquidity<\/strong><\/p>\n

High volume trading on a stock indicates liquidity, and vice versa for low volume.<\/p>\n

Liquidity is important because it impacts how quickly you can buy or sell the stock. This is especially crucial during a falling market where you want to sell as quickly as possible.<\/p>\n

Liquid stocks also tend to have lower bid-offer spread, meaning that you will get better prices when buying or selling.<\/p>\n

A wide bid offer spead indicates that a stock is illiquid, and hence more expensive to execute.<\/p>\n

\u00a0<\/p>\n

Volatility<\/strong><\/p>\n

High volume stocks tend to be less volatile, because the high number of transactions mean price movements are more fluid.<\/p>\n

Low volume or illiquid stocks meanwhile are characterised by big jumps (both up and down) in prices \u2013 resulting in large percentage swings day to day.<\/p>\n

\u00a0<\/p>\n

Sensitivity<\/strong><\/p>\n

Related to volatility, low volume (illiquid) stocks tend to react more to news or events, and vice versa for high volume stocks.<\/p>\n

Trading tends to be more efficient for high volume stocks, since there are more investors in the market to digest the news.<\/p>\n

\u00a0<\/p>\n

Valuation<\/strong><\/p>\n

Because there are less investors wanting to buy the stock, low volume stocks tend to be undervalued.<\/p>\n

While this in itself can create a buying opportunity, problems mentioned above create a self-fulfilling prophecy, turning potential investors away from buying the stock.<\/p>\n

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How chartists interpret volumes<\/h2>\n

Technical traders or chartists often use trading volume data as an entry or exit signal.<\/p>\n

\u00a0<\/p>\n

An upward trend<\/strong><\/p>\n

When a stock is moving up, increasing trading volume in the stock signals that traders are committed to the price move, ie: even more buyers are wanting to buy the stock.<\/p>\n

Chartists often call this momentum, which involves \u201cbuying high, but hoping to sell even higher\u201d.<\/p>\n

An upward trend with decreasing volume, on the other hand, suggests investor enthusiasm has waned \u2013 which is a clear exit signal for the chartist.<\/p>\n

\u00a0<\/p>\n

A downward trend<\/strong><\/p>\n

Meanwhile, when a stock price is falling and is accompanied by increasing volumes, it could suggest more sellers are exiting the stock.<\/p>\n

This should indicate to the chartist that it\u2019s time to sell the stock.<\/p>\n

On the other hand, a downward trending stock with decreasing volumes could suggest the selloff has been overdone.<\/p>\n

This could indicate an entry point for the chartist.<\/p>\n

\u00a0<\/p>\n

\u00a0<\/p>\n

<\/span><\/p>\n

The post Why knowing trading volume is important, and how to use it as an entry or exit signal<\/a> appeared first on Stockhead<\/a>.<\/p>","protected":false},"excerpt":{"rendered":"

The ASX releases top 20 stocks by volume on a daily basis Why is volume data important for investors? 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