If you’re just starting your trading journey, one term you’ve likely heard thrown around is volume. We all know that volume is crucial in trading; without it, filling your orders and getting out of a precarious trade will be hard. But have you heard of dollar volume? If you haven’t, don’t fret; we will unpack dollar volume in today’s blog and show you how to use it to your trading advantage!
What Is the Average Daily Dollar Volume?
What if you want to know the average daily dollar volume of ABC traded over the last 10 days? Suppose ABC stock was trading at $30 per share with an average trading volume over the last 10 Days of 300,000 shares per day.
When these figures are multiplied ($30 x 300,000), the result is a volume of $9 million per day.
This means that, on average, investors are spending a whopping $9 million each day buying and selling shares of this particular stock.
What is dollar volume? Think dollars and think the number of shares. All it is is the total number of shares traded (usually in a day) multiplied by the price of the shares.
For example, let’s say 100,000 shares of AMD were traded at $100/share during a regular trading day on the NYSE. To calculate, simply multiply 100,000 (# of shares) by $100 (cost of shares), and you end up with a dollar volume of 100,000,000 for that specific day.
Why Is Dollar Volume Important?
It is a key indicator of liquidity and money flow in the market. Firstly, any stock with a high dollar volume likely means there’s a lot of interest in the stock.
Secondly, this also means it’s ripe for price movement. Combined with these factors, you’re likely able to get in and out of your trade; there is no bag-holding here.
Alternatively, any stock with a low dollar volume indicates less interest or a less liquid market. Both scenarios could leave your bag holding.
Understanding Dollar Volume Liquidity
More often than not, a stock or ETF traded on a major exchange, with lots of interest from traders, will be highly liquid. In other words, it has high dollar volume liquidity, and buying and selling the stock will be pretty easy.
On the flip side, many traders want to get into a stock before it soars in price. Intuitively, this makes sense, and it’s quite similar to surfing.
One needs to catch the wave as it’s building momentum; you can’t get in waves that have already crested. I’d rather get in when prices are low and ride the wave up than rush when the wave has already passed. Many traders will swim around looking for stocks with low DV liquidity.
A Word of Caution
In some situations, we see stocks with high dollar volume but falling prices. We see cases like this in scenarios of panic selling.
A stock’s dollar volume can remain high even as its value declines, mainly due to increased trading volume resulting from panic selling.
Being aware of high DV and falling prices is important for stock traders due to their potential impact on:
- market liquidity
- trade execution
- potential price reversals
Let’s unpack this below.
Things to Keep in Mind
Liquidity
There is a lot of buying and selling happening with a stock. Unfortunately, newbies might think this is the time to jump in. Not so fast. One vital thing to be watching for is price. More specifically, if the price is falling while the dollar volume is high, the market may be shifting. What this means is that the bid-ask spreads may be wider, causing the fills to be harder.
Trade Execution
In the same vein, if prices fall while the DV stays high, it could indicate strong selling pressure. In your chart, this translates to rapid price movement and overall volatility. My point is that you must carefully consider trade execution before you enter a position.
A Potential For A Reversal In Price
High DV combined with falling prices may suggest a price reversal is on the horizon.
Using a Dollar Volume Filter
If we’ve piqued your interest and you want to use dollar volume as part of your trading strategy, you’re in luck. Most trading platforms have DV filters.
To recap from above, the dollar volume filter takes into account two crucial factors: the current price of the stock and its average trading volume over the past ten days. You’ll get the dollar volume per day by multiplying these two variables together. In simpler terms, it is the total amount of money spent on the stock within a single trading day.
Moving on, activating the DV filter should be pretty straightforward. For those of you using TradeIdeas, simply head on over to the settings section in the window-specific filters tab. This tab is in the alert/top list window’s configuration window. At this point, you just set the minimum/maximum values for your stock, and any that don’t meet your filter criteria are excluded from the scan results.
This filter is particularly useful for not only active traders but also institutions that need to execute large trades quickly.
Dollar Volume Trading Strategies
Let’s briefly review some common strategies where dollar volume can be used.
1. Momentum Trading
Momentum trading is one strategy traders use to make money on trends in stock prices. Firstly, traders look for stocks with high dollar volume liquidity showing strong upward or downward momentum. Then, they trade in the direction of the trend. With high liquidity in the stock, trades can be executed efficiently.
2. Day Trading
Day trading could actually be coupled with momentum trading, but we split it out. Regardless, day traders buy and sell stocks on the same day to take advantage of short-term price changes. Day traders usually focus on assets with high dollar volume liquidity to make sure they can quickly enter and exit positions at good prices. Stocks with high liquidity offer many trading opportunities throughout the day.
3. High Volume Breakouts
Traders who trade high-volume breakouts look for stocks that have both major price movement and high volume. To identify this setup, many traders chart key price levels on their charts and set a minimum dollar volume threshold. Once the price breaks over the price level, they enter if the dollar volume threshold is crossed. This ensures sufficient liquidity and also serves as confirmation of the breakout.
5. Liquidity-based Scalping
We refer to scalping as a high-frequency trading strategy that looks to make money from small price changes in easy-to-buy-and-sell assets. Scalpers quickly buy and sell, often in minutes or seconds, to catch small price movements. They like to trade stocks in dollars because they have narrow differences between buying and selling prices and very little price change when a trade is made.
6. Volume Confirmation in Trend Trading
For trend traders, confirming the strength of the trend is vital; it’s essentially their bread and butter.
One tool to do this is through the dollar volume filter that we talked about above. Essentially, all you need to do is look for a rise in dollar volume that aligns with the trend you’re looking at.
This means the market is participating in the trend. For example, traders may set a minimum dollar volume threshold for a stock in an uptrend to make sure the trend is supported. By supported, I mean sufficient trading activity.
Volume Divergence in Reversal Trading
Trading the reversals is exactly as it sounds, but not as easy as it sounds. The key is to be able to identify when a reversal is coming. To do so, many traders often incorporate dollar volume analysis to figure out where price and volume are starting to go in separate directions.
Final Thoughts: Dollar Volume
There are lots of things to consider when deciding to use dollar volume liquidity as part of your trading strategies. From bid-ask spreads, order book depth, and market volatility to price action, it all matters. By considering these factors, traders can make more informed decisions and manage risk effectively.
Frequently Asked Questions
What Is the Dollar Volume of a Stock?
Dollar Volume is just the number of shares traded multiplied by their price.
What Is the Difference Between Dollar Volume and Volume?
It’s the total value of shares traded. To calculate dollar volume, you multiply the trading volume by the price of shares. On the other hand, trading volume is the number of shares bought/sold during a specific time.
What Is the Average Daily Dollar Volume?
The average daily dollar volume (ADVV) refers to the daily amount of money traded in a particular stock over a specified period. It is calculated by multiplying the average trading volume of a stock by the average price of the stock each day.
What Is Dollar Volume Liquidity?
Dollar volume liquidity is a measure that assesses how easy it is to trade a specific stock or security in the market. It’s based on the total dollar value of shares traded within a given period. This metric considers the trading volume (number of shares traded) and the security price.
