High relative volume stocks present some of the best trading opportunities for day traders. Knowing how to find them is therefore is an indispensable part of any trader’s toolkit.
In this post, you’re going to learn what relative volume is, how to use it in your trading, as well as how to find stocks with a high relative volume.
What is Volume in Stocks?
A stock’s volume is simply the number of shares it has traded over a certain time period. This is usually calculated as a daily measure, however technically any time-period can be used.
For example, if 500,000 shares of a stock change hands on a given day, then it’s trading volume for that day is 500,000.
Volume is usually displayed at the bottom of a stock chart as a histogram. The height of the bars indicate the number of shares traded for that candle. For example, if it’s a daily chart a bar represents daily volume, if it’s a weekly chart it represents weekly volume, and so on.
In general, the higher the volume the more liquid a stock is. It also indicates a greater level of interest from traders, for example if there’s been some news on a stock.
Alternative measures of volume include number of trades and dollar-volume.
Number of Trades
Number of trades is useful for gauging the true level of interest in a stock. Essentially, it reveals whether interest is broad-based or driven by a handful of large trades.
For example, if volume is high but number of trades is low, it means that trading volume is inflated by a few traders placing large orders. In this case, volume overstates the true level of interest in a stock.
When this happens, you should question the sustainability of any price action associated with that volume. Since it’s reliant on a small group of traders, it’s built on shaky foundations and may peter out just as quickly when they stop trading.
In a similar vein, number of trades also sheds light on any market manipulation taking place, particularly if we’re talking about an illiquid penny stock.
Dollar-Volume
Dollar-volume is useful when comparing stocks with different prices per share. It’s a more standardized measure compared to volume, because it reflects the amount of money traded rather than just the number of shares.
For example, imagine 2 stocks: one priced at $1/share with trading volume of 1 million shares, and another priced at $100/share with trading volume of 1 million shares.
While both stocks appear to have the same volume based on the standard definition, the second stock actually trades much more in terms of value: $100 million vs. $1 million.
Luckily, stock scanners such as Scanz include both number of trades and dollar-volume as filters.
What is Relative Volume in Stocks?
While absolute volume provides useful information about a stock’s liquidity and level of interest, it isn’t actually helpful as a standalone indicator.
What do I mean by this?
Well, without any context behind the volume number, it’s hard to know whether it classifies as “high” or “low”. For example, the trading volume of a blue-chip stock stock like Microsoft will always appear “high” compared to a penny stock.
Does this mean Microsoft always has unusual trading activity? Of course not.
Comparing absolute volume across unrelated stocks is futile if we’re trying to detect abnormal trading activity. A better measure would be to compare Microsoft’s current volume against its own historical standards.
That’s where relative volume (RVOL) comes in handy.
Relative volume is a ratio that compares a stock’s volume in a current time-frame against its average trading volume over a previous time-frame.
This way, we can see if Microsoft’s current trading activity is unusual relative to its own historical norms, as opposed to some irrelevant stock. In other words, relative volume gives us an apples-to-apples comparison, and therefore more actionable trading information.
Here is the formula for relative volume:
Relative Volume = Current Volume/Average Volume
As such, when relative volume is less than 1, current volume is below average. And when relative volume is greater than 1, current volume is above average.
To see what this looks like graphically, I have highlighted both of these situations in the chart below. The yellow line represents the 10-day average trading volume.
Average Volume
Average trading volume acts as the baseline to compare current volume against. Importantly, both of these time-frames are flexible.
For example, current volume can be any trading interval from the last 15 minutes, the last day, or last 5 days. Any time-frame you like, for that matter.
However, the lookback period for average volume should be at least as long as the one chosen for current volume.
For example, it would be pointless to use 2-day volume for “current volume” and the last 15-minutes for “average volume”.
How can the last 15-minutes give any context to the last 2-days? It can’t.
Our goal is to establish a reliable benchmark for comparing the current volume against. To do so, it needs to be a length of time that exceeds the current volume.
Swapping the 2 time-frames around in the above example – so that “current volume” was 15-minutes and “average volume” was 2-days – would make sense in that respect.
Again, the lookback period for average trading volume can be any arbitrary number you like.
However, the most common averages are 5, 10, 15, 20, 30, and 60 days.
Personally, I like to look at the previous 2-day (average) volume vs. the previous 20-day (average) volume when calculating relative volume.
Day traders, on the other hand, would probably use shorter time frames, since they’re only interested in finding intraday opportunities. For instance, they might use 1-day and 10-day volumes.
This swing trading vs day trading article explains some other common differences between long term and short term traders.
To work out average volume for any time period, simply take the total volume over that time period and divide it by the number of periods.
Average Volume = Total Volume/Number of Periods
What is a High Relative Volume Ratio?
Generally, day traders look for stocks with a relative volume ratio above 1. This means the stock is currently seeing above average volume, which, as you’ll see in the next section, brings numerous benefits.
More aggressive traders would argue that a high relative volume ratio is anything above 2 or 3.
Conversely, a low relative volume ratio is considered to be anything below 1. This indicates that trading activity is stale, and therefore not of interest for most day traders looking for where the action is.
Why is Relative Volume Important?
There are generally 3 different reasons why traders care about relative volume, however the long and short of it is that it helps them locate stocks receiving attention from the market.
Liquidity
As touched on earlier, relative volume is a key barometer of liquidity. Stocks with relative volume ratios above 1 mean that more shares of it are being traded than normal.
As a result, traders will be able to get in and out of positions at favourable prices.
On the other hand, if a stock is trading at below average levels of volume, then bid-ask spreads will be wider and the risk of slippage increases.
This is particularly the case for penny stocks, where even modest-sized trades can impact the share price significantly.
Volatility
In addition, high relative volume usually coincides with heightened volatility – the life-blood of traders.
For example, if a stock has a relative volume of 3, this means that 3x the amount of shares are being traded than normal. Depending on the balance of buyers and sellers, this clearly has the potential move the share price much more than usual.
In fact, one of the pre-conditions that most traders look for in breakout stocks is high relative volume, because if there’s impetus behind the move, it’s more likely to be sustainable.
For example, the cup and handle pattern relies on increased volume before a breakout.
It should be said though, that high relative volume doesn’t automatically equate to higher volatility. As alluded to, the balance of buyers and sellers is just as important.
Trading volume only tells you the amount of shares traded, not the direction that people are trading in. If buyers offset sellers in an equal amount, then the stock price can remain steady on increasing volume.
This article shows you how to screen for volatile stocks using relative volume.
Trading Opportunities
The final reason why traders track relative volume is because it highlights stocks with unusually high interest.
Why is this important?
Well, because there is usually a reason behind this. Stocks that spark interest amongst traders typically do so because of some fundamental catalyst, such as an earnings surprise, M&A deal, or other market-moving news.
Fundamental catalysts tend to drive momentum in stocks, which presents a trading opportunity for event-driven traders.
How to Find High Relative Volume Stocks
Below, I show you how to implement a high relative volume day trading strategy with Scanz. Trade Ideas is another popular scanner for day trading.
Scanz Stock Scanner
Scanz is a real-time news feed and penny stock scanner. Specifically, it helps day traders scan the whole US market for intraday trading opportunities based on numerous technical and momentum criteria.
For example, it can help you find stocks with MACD crossovers as well as oversold RSI stocks.
For a deeper dive into this platform, read my Scanz review.
Scanz gives you 2 different ways to find stocks with high relative volume:
- Breakout Scanner
- Pro Scanner
Breakout Scanner
The Breakout Scanner provides a live-stream of all stocks displaying high relative volume throughout the trading day.
Simply choose the time-frames you want to compare the current trading volume against, and receive a live feed of all the stocks breaking above those averages in real-time.
In the image below, I’m looking for stocks whose daily volume exceeds either their 5, 20, or 60-day average trading volumes.
One stock with ticker, CVAC, broke above all 3 at the same time.
As you can see in the chart below, the bar representing today’s volume is above all 3 averages (the 3 lines plotted in the bottom window).
Pro Scanner
The Pro Scanner allows you to be much more granular and specific with your scanning criteria.
For instance, you can scan for stocks with a 5-day average volume greater than the 20-day average volume by 5% or more.
You can also include multiple rules, such as minimum volume and maximum float thresholds, particularly if you want to find low float stocks that are liquid.
For instance, the scan below rules out any stocks with dollar-volume less than $1m. It also looks for stocks with daily volume greater than its 10-day average volume.
Here’s the list of stocks that met this criteria in the pre-market. Interestingly, one of the stocks (LITM) has a news notification next to it. This suggests there might be some catalyst behind the pre-market activity.
As you can see, the current volume of 959,758 is above the 10-day average trading volume of 308,470, and the stock is up around 27% in the pre-market.
By clicking the stock you can see its chart, news feed, and other useful data. What I’m particularly interested in is the news article from today, which you open by clicking on it.
Essentially, Snow Lake has just signed an MoU to supply lithium to LG Energy Solutions.
The chart below shows that after the first hour of trading the stock was up around 18% since the open, despite the S&P 500 being down -1.7%.
Not a bad ROI for 5 minutes of scanning.
This is a perfect example of why traders flock towards stocks with high relative volume, and why stock scanners are a crucial part of their toolkit.