There are hundreds of indicators for traders to pick from however most of the times, they won't apply to day traders. However, the relative volume indicator is among the indications that all active traders need to know and comprehend.
Relative volume is a kind of lesser-known concept that very few traders consider. Great for you for putting in the time to broaden your trading understanding!
So what is relative volume? I'll explain it here, along with why it's essential, and we'll get into some gritty information.
Relative Volume (RVOL) is an indicator that informs traders how present trading volume is compared to past trading volume over a given duration. It is sort of a like a radar for how "in-play" a stock is. The greater the relative volume is the more in play it is since more traders are watching and trading it.
As traders, this is what we desire. Stocks that have a great deal of volume have more liquidity and tend to trade much better than stocks with low relative volume. The RVOL is displayed as a ratio.
So if it is revealing 3.5 relative volume, that implies it is trading at 3.5 times its regular volume for that time period.
As day traders we like to see RVOL at 2 or higher with a positive driver, low float and ideally a greater brief interest. When all this falls in line together we have a recipe for parabolic moves that can make trading months and in some cases even years.
This is likewise a good metric to look for possible bottoming or topping in stocks. As a stock gets oversold or overbought we wish to look for volume to get a spike in relative volume which would suggest that buyers and seller are fighting over an essential assistance or resistance level and will likely reverse.
The metric volume reflects the variety of shares traded of a specific stock. All charting platforms have that details about the presently traded volume available, and generally the trading volume is imagined below the chart with rates action.
The most popular relative volume indicators are:
Current day volume vs. previous day volume
Present day volume vs. 5-day average trading volume
Present day volume vs. 10-day average trading volume
Why Is the Relative Volume Indicator Important?
Why is relative volume in stocks crucial? Frequently, brand-new traders tend to ignore this metric in spite of how important it is. The Relative volume indicator is vital for traders to know which stocks are being watched.
And it also helps you see which stocks will make the next big moves. The bottom line is relative volume is akin to unusual volume. It's not "typical" volume or average volume. That being said it's worth a closer look.
Stocks that are experiencing less volume, or average volume are not as intriguing. They can be more unpredictable. And there are also a lot less traders watching these stocks; which can lead to things like choppy price action, or sideways snooze fests.
These are generally less liquid stocks. The typical market maker will also turn their nose up and leave.
The relative volume indicator can offer you an idea of which stocks remain in play and which ones most likely won't provide trading chances. As a day trader, I want to trade stocks that a lot of traders are watching and trading. It means more volume, volatility, and liquidity.
That can mean a tighter spread in between the bid and ask, which enables me to get in and out of my positions easily.
Don't trade illiquid penny stocks, and never believe in these business. Constantly expect the worst from these sketchy companies, and you won't be dissatisfied.
Relative Volume Trading Strategy
Relative volume is an excellent indication to keep a close eye on, but like a lot of signs it works best in conjunction with other indicators and on different amount of time.
For example, I like to see how the RVOL is compared to previous trading days but I likewise like to examine it versus opening drives and 2nd leg drives to compare strength.
In the 1-minute chart of NVDA you will see that it had a very strong opening drive. After a strong relocation like that I like to see it have a draw back to support or the VWAP on lighter volume before making another leg up.
In this case, it returned to support at $97.75 where it consolidated in a tight wedge pattern prior to breaking out to the advantage. The secret to this technique is on the breakout that is marked by the green arrow.
This is where you would look to get long but only if volume validates the move. You can see at the bottom of the chart that volume surged when it broke out of the pattern and held above the resistance line.
This is a great sign that buyers wish to take rates higher with an excellent risk/reward entry.
What To Do With the Details About Relative Volume?
As a day trader, you wish to trade liquid stocks with low spreads to ensure exceptional fills. The greater the volume of an offered stock, the lower the spread in between Bid and Ask.
Small spreads are favorable for good order executions since the slippage, which reflects the distinction in between the rate you went for and your fill rate, will be less significant.
A high relative volume means that the need for the particular stock is relatively high today. This is normally caused by a catalyst like profits statements, mergers, or other news. Hight relative volume also typically appears together with a substantial gap at the market open. That's the case when the news came out during the market close.
How To Identify High Relative Volume?
High relative volume can be easily identified by utilizing a stock screener. My favorite is Trade Ideas given that I can quickly integrate the filter for a space of a minimum of +3% together with the filter of high relative volume of a minimum of 3:1.
Some brokerage platforms permit you to code your own relative volume indicator, and some platforms have a pre-defined indication typically called RVOL.
Relative Volume Example
A fine example would be the Tesla stock that remained in play a couple of days earlier. The higher the RVOL, the tighter the spreads and the lesser the chance of slippage.
Therefore, if you need to choose between enjoying stocks with a low trading volume and enjoying stocks with a high trading volume, you need to always choose to enjoy stocks with a high trading volume.
The RVOL tool is an easy tool that can be used to recognize opportunities in the market proficiently. If the volume of trade is declining, then it is unlikely that the moves will extend.
How to Use Relative Volume in Trading
As a trader, you should constantly utilize the volume indication when trading the market. The easiest method to do this is to utilize the details offered in premarket trading.
For example, if you specialise on trading leading movers, you must use information in premarket trading to discover the top movers and their volume. For instance, in the chart below, we see that Vereit is the best-performer in premarket trading as its stock has risen by more than 400%.
We likewise discover that the typical volume of the company is 2.4 million. However on this day, the volume was more than 9 million.
This indicates that the stock jump is being supported by volume. As such, you require to determine the reasons the stock has actually increased that much. By taking a look at the news of the day, we find that it rose that much because the company completed a 1 to 5 reverse split.
This indicates that there was no major news that would affect the fundamentals of the company.
What's a Good Relative Volume Ratio?
During premarket, I'm trying to find stocks that have actually traded a minimum of their typical volume. By the time the market opens, I've narrowed it down to stocks that have a relative volume ratio of a minimum of four.
That suggests I'm looking for stocks that have traded a minimum of 4 times their average volume. If they've turned their float currently, all the better.
Every morning in my Pre-Market Prep sessions (sign up for my day-to-day premarket digest here) I review the stocks that I'm viewing. I talk about things like float rotation, excessive volume, and developing a trading plan. Come check it out!
What Is a Low Relative Volume Ratio?
Anything less than 1-- for momentum day trading-- just isn't worth my time.
If a stock's typical volume is 100,000 shares, I want it to trade a minimum of 100,000 shares in premarket. A relative volume ratio of 1 is still on the low side. I'm trying to find a minimum of 3 or 4.
What's a Good Relative Volume for Day Trading?
I like to say that stocks have characters. They can have different cost action, display Level 2 in a different way, and they can have clean or choppy charts.
I choose to trade OTC stocks over listed stocks. They tend to have smoother cost action and tidy charts. Noted stocks tend to be choppy-- not my preferred stocks to trade.
You'll discover the stocks, sectors, volume, and drivers you prefer to trade as you acquire more experience. I can just tell you what works for me. And one thing a stock need to have for me to even take a look at it is high relative volume.
What's the best volume number for day trading? There isn't one.
Too many brand-new traders try to make trading an exact science. It's not. There's nobody indication that can inform you if a stock will be a good trade.
And there's no magic relative volume ratio that's good for all stocks. (I'll reveal you why in an example later.).
That's why I constantly stress the significance of studying and getting a trading education. You should think about ALL the indications prior to you make a trade.
Special Considerations
While the relative volume indicator is an excellent indication of trading, there are quite a few things one requires to think about while conducting trades utilizing this tool.
An Increase In Volume In The Early Morning Doesn't Always Mean That The Stock's In Action
Usually the very first 15 minutes of the stock exchange opening is the busiest minute and has a large volume of trades and transactions. This is just due to the fact that the trades that got locked after market closure the previous day are being sold, which is why you will see a lot of activity in the early hours of the morning.
Of all these days, Monday is the busiest due to the fact that, in some circumstances, statements made over the weekend can trigger traders to make buy/sell decisions early in the morning, and this does not always suggest that the stock is in action.
An indicator is simply a mathematical tool, and it does not take human psychology into account. A high RVOL on a stock in the morning does not always mean that the stock is in action.
The Volume Indicator Shouldn't Be Used Alone
It's a common trading stating that "the volume precedes the movement," which means that the volume will improve prior to a motion of the stock.
A cost making a high or a low on a stock has a strong significance attached, and the increasing volume for stock or crypto can symbolize that buyers are now going to buy a larger variety of shares than they would have wanted to a day before.
The buy-sell choices should, however, not be based on the movements of a solo indication. If all the decisions are based upon one sign alone, then it can rather quickly end up being a recipe for disaster with you losing money. It doesn't matter if you are trading cent stocks or large caps, use more than one system or tool to validate your trade. Confluence is key!
When integrated with another sign like the momentum and strength sign, the volume sign is an exceptional trading method. The volume sign will reveal that a move will take place, and the other signs will either verify the prophecy or it.
If utilized correctly, the RVOL can be an outstanding sign for young and experienced traders alike and can likewise assist you bag in a few effective trades.
Combining RVOL With Other Strategies
In most durations, utilizing RVOL by itself tends to be meaningless. For that reason, we suggest a situation where you utilize other trading methods to understand whether to buy or short a property.
When it comes to Mesoblast that is revealed listed below, we can utilize the principles of Fibonacci retracement. Below, we see that the stock crashed to near the 78.6% Fibonacci retracement level and after that attempted to rebound.
Therefore, in the future, we know that there are two primary scenarios.
Initially, the stock might try to fill this space or it may attempt to fall below the retracement level. As such, we can place 2 pending orders that look for to benefit from either of the two. For example, you can place a sell stop order at $2 and a buy stop at $3.
If the stock drops listed below $2, your sell stop order will end up being a market order and press you to success. If it attempts to fill the gap, you will also remain in the cash.
Using the Relative Volume in a Real-Life Example
I said earlier that there's no perfect relative volume ratio for all stocks. State a stock has traded a typical volume of 100,000 shares a day over the last 60 days. Then it appears on your relative volume scanner with an RVOL of 5:1. Seems like high relative volume, right? Not truly. That ratio means it only traded 500,000 shares that day.
That's not enough volume for me. I want stocks trading countless shares.
Let's take a look at another example. Say a stock traded an average of a million shares daily over the last 60 days. If it appears on your relative volume scanner with an RVOL of 5:1, that's 5 million shares in volume. Now, that's a stock I'm more interested in.
There's a big difference in between trading a stock with 500,000 shares of volume and trading one with 5 million. It's the difference between a stock that's in play and one that nobody cares about.
Trading a stock with low volume can make it hard to cut losses rapidly. Less purchasers make it more difficult to offer. You could end up needing to hit the quote simply to get out. Which can leave you with a larger loss than you planned.
Ignore looking for the next Microsoft or Tesla in cent stocks. Don't trade low volume stocks thinking you've discovered the next big technology or item. The opportunities of finding an undiscovered gem are slim. The majority of these business stop working.
Adhere to trading stocks that are in play. Make the most of the patterns that duplicate gradually, and take what the marketplace gives you.
FAQs About Relative Volume
What's Considered Low Volume?
That depends upon the stock's average volume. What's considered low volume for one stock could be thought about high for another. It's not an exact science. You have to discover what works best for your setups and choices.
What's Relative Volume Standard Deviation?
Relative volume standard deviation is a different technical indication from basic relative volume. Relative volume standard deviation is calculated as the volume ratio relative to the basic moving average.
What's the Best Volume Indicator for Stocks?
I use volume bars at the bottom of my charts and compare them to past volume spikes when I recall at the chart over various amount of time. However you can use any volume indication you like. The relative volume indicator is a ratio of existing volume compared with typical volume.
Final Thoughts
As you can see, you do not have to be a mathematics genius or a programmer to benefit from relative volume. In fact, you can typically inform at a glimpse how liquid a stock is. With a few short computations, you can choose which stock may have the most eyes on it.
The Relative Volume Index is an important concept that you need to constantly use when trading in the financial market. The index can provide you an excellent photo of what is taking place in a provided stock.
But utilizing it alone is not worthwhile. For that reason, we suggest that you combine it with other monetary tools.
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