The trade volume during a large price increase or decrease is often important for traders as high volumes with price changes can indicate specific trading catalysts. High volumes associated with directional changes in price can also help to reinforce support for the value of a security.
Volume levels can also help traders decide on specified times for a transaction. Traders follow the average daily trading volume of a security over short-term and longer-term periods when making decisions on trade timing. Traders can also use several technical analysis indicators that incorporate volume. The Securities and Exchange Commission (SEC) regulates sale of securities by traders. According to Rule 144, sellers cannot make security sales exceeding 1% of outstanding shares of the same class being sold.
Example of Volume of Trade
Suppose a market consists of two traders. The first trader buys 500 shares of stock ABC and sells 250 shares of XYZ. The other trader purchases 500 shares and sells 250 shares of stock DEF to the first trader. The total volume of trade in the market is 1000 (500 shares of ABC +250 XYZ shares + 250 shares of DEF).
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