Relative Volume: What It Is and How To Use It
This article explains what relative volume is and how day traders are using this trading indicator to identify trading opportunities.
What Is Relative Volume?
Relative Volume is a trading indicator primarily used by day traders that compares the current trading volume relative to the usual trading volume in the past.
The metric volume reflects the number of shares traded of a specific stock. All charting platforms have that information about the currently traded volume available, and typically the trading volume is visualized below the chart with pricing action.
The most popular relative volume indications are:
- Current day volume vs. previous day volume
- Current day volume vs. 5-day average trading volume
- Current day volume vs. 10-day average trading volume
Let's say the current day trading volume for a small-cap stock is 5,000,000 shares at 10 AM EST in the morning, and yesterday's trading volume was 500,000 shares in total. The relative volume is 10:1.
What To Do With the Information About Relative Volume?
As a day trader, you want to trade liquid stocks with low spreads to ensure excellent fills. The higher the volume of a given stock, the lower the spread between Bid and Ask.
Small spreads are favorable for good order executions since the slippage, which reflects the difference between the price you aimed for and your fill price, will be less significant.
A high relative volume means that the demand for the particular stock is relatively high right now. This is typically caused by a catalyst like earnings announcements, mergers, or other news. Hight relative volume also often appears together with a huge gap at the market open. That's the case when the news came out during the market close.
How To Identify High Relative Volume?
High relative volume can be easily identified by using a stock screener. My favorite is Trade Ideas since I can easily combine the filter for a gap of at least +3% along with the filter of high relative volume of at least 3:1.
Some brokerage platforms allow you to code your own relative volume indicator, and some platforms have a pre-defined indicator often called RVOL.
What To Do next?
The high relative volume filter helps get your watchlist down to a manageable list of shares for a specific trading day. Now it is essential to check if the supply and demand remain at a high level. Sometimes it happens, that one huge block trade leads to the high relative volume ratio. In this case, the stock should be dropped from the watch list when the trading volume gets thin after that. I always want to see high relative volume whenever I get into a trade, so whenever the volume drops sharply, I don't care about that stock for the day anymore.
How To Get Started?
High relative volume needs to be combined with a trading strategy. Breakout strategies work well on high volume. That can be new daily highs, higher highs, higher lows with bar by bar confirmation or even a breakout within a specific time-frame above the previous candle high. Understand relative volume as a filter to reduce the number of stock symbols you are looking at. High relative volume stocks tend to be better tradeable and manageable than stocks with a relatively low volume ratio.
In a perfect world, you use the gap and go strategy and find a stock with high short interest that gaps up sharply on high relative volume ratios like 3:1 that keeps momentum aftermarket open by making clean technical moves on a candle-by-candle basis keeping the high volume.