Volume represents the total number of shares, contracts, or units of an asset that have been traded over a specific period. It is a direct measure of market activity and liquidity for that asset. While raw volume provides a snapshot of how much trading has occurred, it does not inherently offer context about whether that activity is typical or unusual. Relative volume extends this concept by comparing current trading activity to its historical average. This comparison helps in identifying if an asset is experiencing significantly more or less attention than usual.
Understanding Relative Volume
For instance, if 1 million shares of a company are traded in a day, its daily volume is 1 million. This raw figure indicates the level of buying and selling interest for that asset over that specific timeframe.
The term “relative” in relative volume signifies a comparison of current trading activity against a typical or average level. It provides a frame of reference, indicating whether the current interest in an asset is higher, lower, or consistent with its historical patterns. By providing this comparative context, relative volume helps market participants assess the significance of current trading levels beyond just the absolute numbers.
Calculating Relative Volume
Relative volume is determined by dividing the current period’s volume by its average historical volume for the same period. This historical average typically spans a range of days, such as the last 10, 20, or 50 trading days, depending on the asset’s typical trading patterns.
For instance, if a stock typically trades an average of 1 million shares per day over the past 20 days, and on the current day, it has traded 2 million shares, the relative volume would be 2.0 (2,000,000 / 1,000,000). A relative volume of 1.0 indicates that the current trading activity is precisely in line with its historical average.
Interpreting Relative Volume
A high relative volume suggests that an asset is experiencing an unusual surge in trading activity compared to its typical levels. For example, a relative volume of 2.0x, 3.0x, or even higher, implies significantly increased interest from market participants. This elevated activity can often be linked to new information, such as earnings reports, product announcements, or significant news events that prompt a strong reaction in trading. Such a surge can also signal a potential price breakout or breakdown, as increased participation often accompanies significant price movements.
Conversely, a low relative volume, such as 0.5x or 0.7x, indicates that trading activity is substantially lower than the historical average. This can suggest a lack of significant interest or news surrounding the asset, leading to quieter trading sessions. Low relative volume often points to periods of consolidation, where the price is moving within a narrow range, or a general disinterest from traders. It can also signify a lack of conviction behind any price movements, as fewer participants are involved.
Relative volume is particularly useful for confirming the strength of a price move. For example, a strong price increase accompanied by high relative volume often indicates a robust upward trend supported by broad market participation. Similarly, a significant price drop on high relative volume can signal strong selling pressure. This metric also helps in identifying assets gaining unusual attention.