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How To Use Volume To Trade Stocks

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What Is Volume?

Stocks trade when markets are open. Some stocks are traded less some more. The number of shares that is bought and sold over a given time period is volume. Note that volume can change over given time period.

For example when the PNB Scam news came the next day PNB witnessed more than average volume.

Where to find high volume shares on a particular day in India?

Top 25 – Volume Gainers – Source NSE India

Most Active – Volume – Source Economictimes

Stocks that are witnessing a huge surge in volumes – Source Moneycontrol

Note for people who trade looking at candlestick:

At the bottom of the chart most software will show you volume of the share traded on one candle stick on whatever time-frame you are looking at. For example if you look at daily chart time frame, you will see the number of shares traded each day of a stock. If you switch to the 5 minute chart, you will see the number of shares traded every 5 minutes of a stock. 5 minutes chart is very popular among the intraday day traders.

Volume is mentioned a lot in trading community but people cannot interpret it correctly. Most traders think that volume increase means buy the stock. This is wrong interpretation.

When sellers are more than buyers – the stock will go down.
When buyers are more than sellers – the stock will go up.

In both the above cases volume may increase. So what is the problem? The problem is we cannot know for certain at what time the volume of buyers will increase or the sellers. This is where traders go wrong.

How To Use Volume To Trade Stocks?

Stocks that have suddenly gained momentum have seen a surge in volume. These stocks you can find from the above links. So the hard work is already done for you.

The best momentum stocks have high relative volume.

What is relative volume?

All shares have an average volume trade per day. When a move suddenly it is almost certain that they are trading above their average volume. Stocks will usually trade at above average levels of volume when they open gap up or down. This can be due to a news, announcement, merging, quarterly earnings, dividend declaration and many other factors.

When they become momentum stocks they are trading well above the relative (average) volume. This does not mean that they will go up or down in future.

Look at Reliance Communications chart on 16-May-18 time: 11.19 am – see that volume has increased but stock has fallen 13.31%:

Reliance-Communications-16-05-18

When volume increases the stock may move above or below their daily trading range.

So what is the benefit to a day trader trading momentum stocks?

They can capture big profits if they get the direction right. However they can take a small stop loss.

Trading momentum stocks is good for a intraday trader.

When a stock gaps up or down with more than 3% then you can rest assure that its volume has increased. Some shares will see an increase of volume in first 10-15 minutes then the volume goes down. But for a good trader this time is enough to make good money.

Go With Momentum In First Five or Ten Minutes

When you see a volume surge then you can go with the momentum to trade that stock intraday with strict profit and loss targets. Keep the targets in the system not in your mind.

Here are some articles I have written on stop loss that you can read:

1. Percentage On Margin Blocked Stop Loss Method
2. Using Trailing Stop Loss To Increase Profits
3. Stop Loss Methods

Conclusion

  • Surge in volume in a stock is good for day traders
  • Go with the momentum if the first few minutes
  • Make sure your profits and stop loss is in the system and not in your mind
  • Do not worry about the volatility of a stock – it is nature of the stock markets


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  • About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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