What You Can Learn From Stock Trading Volume

Upbeat music plays throughout.

Narrator: Buying and selling the same stocks as institutional traders is one way to try to increase in trading success.

While identifying trends can help you find these stocks, sometimes it helps to look at volume, too. Volume is the number of shares traded on a particular day and can provide further evidence of institutional buying or selling.

Let's look at how to combine trend and volume. Also, I'll show you a tool in paperMoney^®—the On Balance Volume indicator, or OBV.

First let's look at a bullish example, where volume increased during an uptrend.

On-screen text: Disclosure: Inclusion of real symbols is for illustrative and educational purposes only, and is not a recommendation to buy, sell, or hold any specific security. Past performance of any security or strategy is no guarantee for futures performance.

Narrator: For this example, we'll look at a one-year daily bar chart of Meta Platforms. The volume is in the pane on the bottom of the chart. Each column represents a day. In February of 2023, Meta had a positive earnings announcement. The good news caused an influx of demand, resulting in many buy orders.

This is reflected in a volume spike and a price gap. Gaps happen when price makes a big move since the last price with no trading in between. In this case, the price gapped up to find enough supply to fill the demand.

Price continued to rally, resulting in a new high. Eventually buying slowed and the stock pulled back. Volume returned to normal, and price created a new higher low.

The stock created new higher highs and higher lows through February.

Throughout the trend, notice how volume increased with each rally. Increased volume on the rallies suggests institutions are buying the stock.

Let's see what happens to volume in a bearish example.

Big Lots created lower highs and lower lows from June of 2022 to May of 2023. I'll draw a trendline.

Now let's look at volume. Notice that volume spikes have occurred more often on down days. If I zoom in from June to November of 2022, we can see that volume was low going into the big August rally, but then it increased through much of September.

The higher volume and the faster price selloff may reflect selling from institutions. This is another example of how combining volume and price can provide clues as to where institutions are putting their money.

When it comes to analyzing volume, there are a couple things to keep in mind. First, downtrends are commonly faster than uptrends.

Animation: A dotted line moves up and down a graphic of a staircase leading up to a window. The dotted line goes out the window.

Narrator: In fact, it's been said that stocks take the stairs going up, and the window going down. You saw this in the previous example. Therefore, you should consider ways to protect your investments.

Second, sometimes high-volume stocks don't show large volume spikes. This makes it difficult to tell where institutions may be putting their money.

A stock like Apple trades 60 million shares per day. Compare that to IBM's 6 million shares per day. To cause a spike in Apple, a lot of institutions would need to be trading the stock.

However, there are charting indicators like the OBV to help you spot volume strength with the trend. It measures the volume on up and down days to see where the trend's strength is. First, I'll show you how to add the indicator, then, we'll talk through how it works.

For this example, let's use Builders FirstSource. I'll type BLDR in the search field and hit enter.

Now, I'll add the OBV by clicking the Edit Studies button.

Next, I'll scroll down to On Balance Volume and select it. Now, I'll click Add selected.

OBV works best if it's visually overlapping price because it helps you identify the trend and its strength. By placing them side by side, you have an easy comparison. So, I'm going to move the study over the price. This is done by placing the mouse over the On Balance Volume pane and clicking the up arrow until it's in the price pane like this.

Finally, I'll click Apply, then OK.

Here's what to consider. When volume is confirming an uptrend, the OBV line will uptrend at a greater rate than the stock price. When volume is confirming a downtrend, the OBV line will downtrend at a greater rate than the price.

Builders traded sideways the last part of 2022. When we look at the volume pane, despite a couple of volume spikes, the stock failed to break higher or lower. However, the OBV was uptrending, suggesting that institutions were accumulating shares. For traders using this tool, the January rally that took the stock above its August 2022 highs, may not have been a surprise.

Uptrends identify stocks in demand. Combining trend with volume provides more evidence when attempting to identify which stocks institutions may be buying.

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