Relative Volume: Everything You Need to Know

Comparing the Volume of stock traded in two securities can calculate relative Volume. The relative volume ratio can compare volumes on different exchanges or securities. Divide today's trading volume by yesterday's trading volume to find the relative Volume for each security.

There are hundreds of indicators for traders to choose from, but they won't apply to day traders in most cases. However, all active traders should be aware of and understand the relative volume indicator. The relative volume concept is one that not many traders are aware of. Good for you for taking the time to expand your trading knowledge! 

Trading the financial markets requires an understanding of Volume. Several previous articles have been in our Volume, VWAP articles, and on-balance volume articles. All types of technical indicators on the market should use with volume indicators.

Day traders need to consider relative Volume. You can use it to determine whether a stock is trading at a low, high, or average volume. Day traders are interested in stocks with high volumes. This indicator gives you an understanding of whether a stock is trading at a high, low, or average Volume. This article explains relative Volume and how day traders use this trading indicator to identify day trading opportunities.

You can use high Relative Volume to help you choose which stocks to trade or when to enter and exit by simply looking for patterns in the volume indicators that correspond with price trends.

What Is Relative Volume?

RVOL (Relative Volume) is an indicator that shows trading volume over a given period compared to previous trading volume. This indicator can gauge a stock's "in-play" status.

As more traders watch and trade this market, the relative Volume is higher. As traders, this is what we want. Stocks with high volumes tend to be more liquid and trade better than those with low volumes.

This indicator measures how the current trading volume compares to the trading volume in the past, primarily used by day traders. Metric Volume indicates how many shares of the stock are traded. In all charting platforms, this information about currently traded Volume is available and usually plotted below the chart along with the pricing action.

Ratios serve to display RVOL. If it shows 3.5 relative volumes, it will mean it traded at 3.5 times its normal volume during that timeframe. The RVOL should be at least 2, accompanied by a positive catalyst, a low float, and ideally, a higher short interest.

Stocks that become oversold or overbought will likely experience a spike in Volume, which will indicate there is fierce competition over a critical support or resistance level, and the stock will likely reverse.

Relative volume indications that are most popular are:

• Volume for the current day compared to the previous day

• Trading volume for the current day as compared to the five-day average

• trading volume for the past ten days

What is a High Relative Volume?

Stock screeners allow you to recognize stocks with high relative Volume. As my favorite, Trade-Ideas has a high relative volume filter of at least 3:1 and a gap filter with a minimum of +3%.

You can code your relative volume indicator on some brokerage platforms, and some platforms have a predefined indicator called RVOL.

Why Is Relative Volume Important?

It is one of the most helpful tools for confirming support and resistance levels when there is a high Relative Volume. Relative Volume increases when traders are interested in a particular market move, while relative Volume drops when traders are disinterested, and volatility decreases.

When the trend is strong enough for it to continue and ultimately become self-sustaining, and when price action doesn't have enough power to move any further - this gives you an idea of where the next important turning point might be. There is always a demand and supply on the market. Volume is how many shares are traded. Without Volume, prices do not move very much. The relative Volume tells us how many shares traded relative to typically traded. It can be a great indicator that unusual price action is about to happen when it occurs. 

There are indeed some low-volume breakouts. Position traders may find those applicable. As day traders, we like our stocks to be volatile. When Volume is unusual, it results in exceptional moves. Trades inspired by significant Volume moves to boost breakout traders and momentum traders. You want to be at the party as a day trader. 

Using the relative volume indicator, you can determine which stocks offer trading opportunities and which ones do not. The stocks that many day traders watch and trade are the stocks I want to trade. It means more liquidity, volume, and volatility. If the difference between the bid and ask spreads is tighter, it can make it easier to enter and exit my positions. 

How to Calculate Relative Volume?

You can choose a stock screener. If your goal is to find stocks with high volumes, you can use stock screeners. Combining a +3% gap filter with at least a 3:1 relative volume filter is easy.

There are brokerage platforms that allow you to code your relative volume indicator, and there are platforms with predefined indicators, such as RVOL. You divide the Volume for the day by the Volume for the average day.

Relative Volume calculated as follows:

1. You can view the current and daily Volumes for a specified period. Dividing Trading Volume by the number of trading days in each trading session (usually one day for most equity and options markets) will give you the daily trading volume.

2. Subtract yesterday's Trading Volume from today's Trading Volume (current period). In the case of today's trading volume of $100 million and yesterday's trading volume of $200 million, today's relative volumes are $100 million / $200 million = 50%.

3. Find the relationship between these two numbers when you know them both:

   53% > 100% – This indicates a higher activity level by traders today than yesterday.

   51% = 100% – There is no directional bias (no trading activity) on both days.

   48% < 50% – This means the activity of traders yesterday was more significant than today.

   49% < 51% – The amount of trading today was more incredible than yesterday.

   50% = 51% - The Volume is equal on both days; there is no directional bias.

You should use Volume-Price Analysis to confirm a price trend before entering a position with Relative Volume, and you should enter an order at the close of the day when confirmation of your trading signals has occurred. 

Relative Volume Example

A good example is in the 15-min chart above of GLBS. They were in play the last couple of days, as you can see by the increased Volume compared to previous days. That is what we like to see in stock to confirm that many traders are watching it and that it is "in play." Stocks that are not in play mean that fewer traders are watching them, which will lead to inaccurate breakouts or choppy price action.

Furthermore, you will have greater liquidity in the stock with higher relative volume, which will allow you to trade with a more significant size without a lot of slippages.

Here's another example. Let's say a stock traded a million shares daily on average over the past 60 days. If it appears on your relative volume scanner with an RVOL of 5:1, that means there are 5 million shares. That sounds more appealing. If a stock has five million shares of Volume, it's much different from one with 500,000 shares. Having play stock is different from having one that no one cares about. 

When trading a low-volume stock, you may have difficulty reducing losses quickly. Selling is more difficult when there are fewer buyers. You may have to make a high offer to sell. As a result, you may suffer a more extensive loss than expected. 

Penny stocks aren't suitable to search for the next Microsoft or Tesla. Never trade low-volume stocks thinking you've discovered the next big thing. It's doubtful you'll find a hidden gem. This type of company usually fails. Do not trade stocks that are not in play. Markets repeat patterns over time, so take advantage of that.

How to Use Relative Volume When Trading?

Finding the right stocks to trade is crucial for any trading strategy. It won't be of much use when taking a trade, but it will be helpful when finding stocks to watch. With that information, you can come up with a strategy to follow. A trader should always work with the volume indicator when trading the market. You can achieve this by using the premarket trading information.

You should, for example, use information you can find in premarket trading to find the top movers and their Volume if you specialize in trading top movers. The following chart shows that Vereit's stock has increased by 400% in premarket trading.

Furthermore, we discover that the company has an average volume of 2.4 million. That day, however, the Volume exceeded 9 million.

Volume is therefore supporting the stock's rise. It would be best to determine why the stock has risen so much in such a case. According to the day's news, the stock price rose that much because of a 1 to 5 reverse split. It means there were no significant headlines that would have affected the business' fundamentals.

Relative Volume Trading Strategies

Indicators like relative Volume are good to watch, but they work best when combined with other indicators and different time frames. You will want to see how the RVOL compares to previous trading days, but you will like to compare it to opening and the second leg drives to see how strong it is.

NVDA had a strong opening drive, as you will see in its 1-minute chart. Ideally, we should see a pullback to support or the VWAP on the lighter Volume before making another leg after a strong move like that. In this case, it broke through the support at $97.75 before consolidating into a tight wedge pattern. The key to this strategy is the breakout marked by the green arrow.

That is where you would look to get long, but only if Volume confirms the move. At the bottom of the chart, you can see that Volume spiked when it broke out of the pattern and held above the resistance line. It is an excellent indication that buyers want to take prices higher with a significant risk/reward entry.

Here are a few ways to incorporate relative Volume into your trading strategy.

• Be on the lookout for a spike in relative Volume when trading breakouts. It can confirm the move and increase the chance of a successful breakout. 

• You can also watch for an increase in relative Volume at a support level if you like the dip-buying strategy. It may be necessary to cover when more buyers enter the stock. It could indicate that the stock has bottomed.

• Likewise, resistance areas could be affected. When relative volume spikes and a stock fail to break above resistance, it can indicate many sellers. 

• But it's not an exact science. A stock could reject a breakout level and come back later to break out successfully. That can create a more significant move if it triggers a short squeeze. 

• Again, it comes down to lining up multiple indicators before making a trade.

What's a Good Relative Volume Ratio?

Each stock has its own personality. Level 2 is displayed differently in different price actions, and the charts are either smooth or choppy. Trading listed stocks is preferred over trading OTC stocks. The charts tend to be cleaner and the price action smoother. You'll find the stocks, sectors, catalysts, and Volume you prefer to trade as you gain more experience. It can only tell you what works for you. And one thing a stock must-have for you to even look closely at is high Volume.

When it comes to day trading, what is the ideal Volume? A perfect volume does not exist. New traders are often misled. Trading does not follow an exact science. This is not true. No indicator can tell you if a stock will be a good trade, and there's no magic relative volume ratio that's good for all stocks. That's why you should always know the importance of studying and getting a trading education. It would help if you considered ALL the indicators before making a trade. 

What Is a Low Relative Volume Ratio?

The average Volume of the stock determines that. The Volume of one stock can be below, and the Volume of another can be high. A perfect formula does not exist. You have to determine what is right for you.

Momentum day trading just isn't worth my time if it's less than 1. If a stock's average Volume is 100,000 shares, I want it to trade at least 100,000 shares in the premarket. A relative volume ratio of 1 is still on the low side. I'm looking for at least 3 or 4.

What Is a High Relative Volume? 

When deciding which stocks to trade, looking at the relative Volume of each stock is a key factor. It indicates that more traders are interested in the stock, which indicates the potential for bigger, volatile movements. Nevertheless, it is not a precise science. Sales can increase with more Volume as well. Therefore, you shouldn't depend solely on one indicator to determine if a stock represents an opportunity to trade. Consider multiple indicators before making a decision. By doing so, you can make informed decisions.

How to Combine Relative Volume with Other Strategies? 

Generally, using RVOL alone is meaningless during most periods. We recommend using other trading strategies to ascertain whether you should buy or short an asset instead.

The Fibonacci retracement method can be applied to Mesoblast, as shown below. According to the chart below, the stock dropped to a 78.6% Fibonacci retracement level before attempting to recover.

Therefore, we know that there will be two major scenarios in the future. Stocks may attempt to close the gap or lower the retracement level at first. In order to take advantage of either of these options, we can place two pending orders. If you want to sell stop orders for $2 and buy one for $3, you can place them.

Sell stop orders become market orders if the stock drops below $2, which will push you to profitability. Then you will also be in the money if it fills the gap.

Conclusion

To be successful when trading in the financial markets, you should always use the Relative Volume Index. Using the index, you can get a good sense of what is happening with a particular stock.

As you can see, relative Volume doesn't require you to be a mathematician or programmer. Sell stop orders become market orders by just looking at how liquid a stock is. You can figure out which stock may have the most attention by making a few quick calculations. Keeping things simple is always best.