What is Volume in Trading?

Volume also referred to as lots and contract size, represents the total number of shares or contracts traded for various securities such as stocks, bonds, indices, currencies, commodities, etc.

While stocks trading, looking at the volume should be taken into consideration since it reflects how much investors are interested in a company. Furthermore, it is worth noting that the volume measures the number of assets traded, not the actual number of transactions. Therefore, if six buyers purchase one share each, it would be counted the same as if one buyer purchased six shares.

How is Volume Interpreted in Trading?

If a security has a higher volume of trade, it indicates that the stock market is being labeled as active and has high liquidity. As a result, there is an increased chance of order execution, meaning that the market has a greater number of buyers and sellers.

Generally, significant price changes in the market, which could most probably be due to news reports, company or political announcements, and other factors, result in higher trading volume. Moreover, usually, there is an increase in trading volume during the opening and closing of a trading day, as well as on Mondays and Fridays as they signify the start and end of the trading week.

On the other hand, low-volume instruments are traded less and are typically found in smaller, and quieter markets. Furthermore, they are characterized as having low liquidity, which means there are fewer people buying and selling in the market.

Importance of Calculating the Volume

Calculating the volume is really important for effective risk management and making informed trading decisions. It helps the trader determine if they are able to afford the trade or not. Therefore, traders should avoid risking more than what they can afford to lose.

How to Calculate Volume

To calculate the volume of a trade, the trader needs to take into consideration the lot size and the number of lots traded in order to use volume trading effectively. Note that the lot size can vary among different financial instruments.

Let’s look at the examples provided below to get a better understanding of the concept.

If a trader wants to buy 5 lots of EUR/USD, the total volume of the trade would be 500,000 euros (5 lots x 100,000 units per 1 standard lot for currencies).

Moreover, if a trader wants to buy 3 lots of Gold, the total volume of the trade would be 30 oz (3 lots x 100 oz per 1 standard lot for Gold).

However, if a trader wants to buy 2 lots of US100, the total volume of the trade would be 40 (2 lots x 20 per 1 standard lot for US100).