Volume is the number of shares or contracts that indicates the overall activity of a security or market for a given period.
How do Trader’s use volume when trading?
1st – Establish a minimum amount of volume you need to trade the underlying product
Generally, a million shares traded per day on a stock or Exchange Traded Fund (ETF) will indicate a liquid and tradable company. The more liquid the stock, the more likely the options contracts will be liquid as well
2nd – Use it as a Technical Confirmation
Volume confirms price. Strong moves – up or down – with a higher amount of volume indicate that traders are making decisions with more conviction. A large volume bar, on big candlesticks, tends to indicate that institutional players are moving in or out of a market.
Increasing volume and decreasing volume patterns give us information about the underlying price action, and the strength or weakness of those moves.
3rd – Use a Volume Indicator
There are many volume-based indicators that are popular with traders. On Balance Volume (OBV) and the Chaikin Money Flow (CMF) are two of the more popular ones. Consider adding a volume indicator to your chart, to help you understand the volume characteristics of the underlying.
