Relative volume is a strategy that many newer traders overlook.
Using relative volume in your trading, you will gain critical insights into what a stock price is doing.
This post precisely describes what relative volume is and how you can use it in your trading with a relative volume scanner.
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What is Relative Volume?
Relative volume is an indicator that will show you the interest in a stock over a period of time and if this interest is rising. It does this by comparing the current volume to the previous volume.
Why is this important? Because if the volume is rising compared to what it is typically, it could indicate a big push higher or a sell-off is occurring.
Relative volume is shown as a ratio. For example, if the relative volume is now 3, the volume compared to usual is three times higher than average.
The more traders are trading a stock, the higher the relative volume number will become.
How to Use Relative Volume
One of the significant reasons prices move in any market is supply and demand. When the demand outstrips, the supply prices will move higher. When there is more supply compared to demand, the price will move lower.
For prices to make a decisive move, there needs to be volume and a high level of stock trading.
When we can see that the relative volume increases compared to average volume levels, we can see it as a sign that something is about to happen in that stock. The general rule of thumb is when volume starts to spike, so do price movements which are very useful to know and understand.
Relative volume is often used by day traders looking for spikes in volume to trade breakouts or continuations.
Some traders will also use this information to see when the price could be bottoming or topping and looking to reverse.
Relative Volume Trading Strategy
Some of the most significant moves will occur when the volume being traded in a stock starts to spike and move to exceptional levels. This can lead to both big moves higher but also big sell-offs lower.
If you are a day trader, you will be looking for short sharp moves. You will also be looking to get filled into your trades with the lowest cost.
The more volume in the stock, the more people are trading it. This will help you quickly and easily get into and out of your trades.
You will start to see volume spike in a particular stock because of things like earnings announcements or essential news like mergers.
You will often see an increase in relative volume when important news is announced when the market has been closed. This will then usually be accompanied by a gap at the markets open.
Using a Relative Volume Scanner
The relative volume scanner by ‘Market in Out‘ is one of the best scanners you can use.
Using this scanner, you can quickly find stocks that are spiking in their volume.
Market in Out calls this their breakout scanner, but it also shows you the relative volume you need to know and when the volume is increasing.
You will also be able to find the stocks that are trading on lower volume levels.
Using the filters in this relative volume scanner, you can set the limits to filter the stocks you are interested in.
Using this scanner is to find potential breakout trades. When you use this information with the relative volume information, you can quickly start finding very high probability trades.
Relative Volume TradingView
One of the best trading platforms you can use for your trading is ‘TradingView.’
TradingView has relative volume indicators built directly into their charts that you can use to find a spike in volume levels.
One of TradingView’s leading relative volume indicators is calculated using any time frame you like using information from when the stock was traded.
You can use the relative volume indicators by TradingView to find either higher time frames or day trading trades. See an example below of what one of TradingView’s indicators looks like added to your chart.
As we have just discussed, using relative volume in your trading can give you great insights into what a stock price is doing and why it is doing it.
While you can use the relative volume on its own, it is always advisable to use it with your other favorite indicators and trading strategies to increase your chances of making profitable trades.
Stock Markets Guides content team.