A Day Trader's Guide To Interpreting Volume

A handful of recent episodes in my day trading routine (as well as a few entries I've written for this series) made me realize that my own take on trading volume is kind of privileged. I mean that I have gotten used to being able to shoot a quick glance at a stock’s volume and translate that into a plan, an idea, or at the very least sense of whether I should keep an eye on that stock. That’s why I wanted to write up a quick piece the ways I’ve learned to interpret volume.

The thing is, beyond gauging liquidity and spread, volume can act as a huge asset in defining your particular approach to trading. You could focus on volume based on stock’s relative momentum, as an indication of larger trading patterns or as a function of a momentum-based technical indicator such as on balance volume.

This all dawned on me as I was explaining my thought process on my watchlist from a trading recap from last week. I was describing the chart on Juno Therapeutics Inc JUNO on a day it was popping in premarket.

I was saying that the high volume in Juno was something that immediately leapt out to me. But rather than being appealing, I was aware of the fact that premarket traders were already in the stock en masse. Connecting those dots helped me arrive at the fact that anyone trading Juno at that time was already in. Once the bell rang, there wasn’t anywhere for the price and volume to go but down.

I might not have traded Juno anyway, since its price is a little high for my liking. However, that realization could have saved me from chasing something that would have cost me a chunk of change once all the premarket traders cashed out.

That recap helped me realize how conditional volume really is. A day or two later, as I was going through my watchlist, I highlighted a few stocks whose high float made their turnover less appealing to my overall trading strategy. I’m generally cognizant of a stock’s available shares, but it was after the Juno explanation that I appreciated how the float relates to volume in informing whether I’m going to enter a position or not.

All that to say, I developed a sense of how to read a volume chart in relation with all those other factors by trial and error. However, tools — like a well-tuned scanner and optimized array of market data sources — help immensely in how I interpret that data.

If you want a sense of my setup and how my gears turn in the moment of the trade, be sure to check out my YouTube channel for updates on my trading journal.

Disclosure: Warrior Trading is an editorial partner of Benzinga.