Volume and its Importance for Automated Trading

What is the importance of volume on a trading chart? Why and how can you use volume in your automated trading? While these questions might sound basic, they actually are fundamental to any successful day trading strategy regardless if your are trading manually or using some form of automation.  Let’s examine a little more about why I think Volume in Automated Trading is important.

What is Volume and how to use it in Automated Trading?

Volume means there are other traders buying and selling the same stock that you are trading. For price to move you need these buyers and sellers. If no one is buying or selling, then the price won’t move much if at all. When this happens we can start to see spread widen, and your orders might not get filled at a price you’d like. 

When there are many buyers and sellers then we can expect to see the price move more and much tighter spreads. Orders can get filled much quicker and at much more attractive prices. The more volume of trades on a particular stock means that your chances of getting a better price is much higher. This can be important when you are day trading and buying large quantities of stocks looking for small moves.

What is volume

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Volume in Automated Trading

One of the key components I’ve learned when I moved from being a manual trader to a full time automated trader is that volume plays if not the biggest role of whether my bots take the trade or not. Why is this?

Simply because if there isn’t enough volume for your robots, then one of a few things could happen:

  • The spread will eat up any profits, or worst, if you get stopped out, the price might be worst than expected.
  • Most automated trading strategies have a time limit for how long the orders are good for when executing or getting into the trade. With low volume, its possible you won’t ever get into the trade
  • You might get triggered into a low quality trade. Your automated strategy saw the right signals but if there is no volume then the pattern you are playing not work out if there are few buyers and sellers.
low volume chart

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This is an example of a stock with low volume. While the chart might give your strategy a buy or sell signal, there is no volume to support the move. If there isn’t enough volume, the pattern you are trading might not play and you could be stuck in a bad trade.

What is a good amount of Volume?

While this can be up for debate, the first filter I use before I even consider trading a stock is that its last 3 months of volume is about 500,000 shares daily. If the stock doesn’t trade that many shares in a day, my robot’s won’t even look at it.

The next filter I look for is volume for this particular day. Most of my strategies only trade in the morning session of the US stock market. Therefore I usually want to see anywhere between 250,000 – 300,000 shares already traded today before my short term robots would take the trade. 

Finally, I make sure that the volume in this particular candle time frame I’m trading in, is also above 200% of its normal volume.

How to use Volume in your Trading

If you are manually trading, then you can simply use your favorite charting software and add the volume indicator to your chart. Additionally most charting software’s will allow you to add a moving average to the chart so you can get an idea of how much volume the stock has been trading over 20, 50, or even 100 days if you wish.

moving average on volume chart

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If you are trading with automation, then it is as simple as adding a volume requirement to your strategy. For those who use Trade-Ideas for your trading automation be sure to check out some of my articles here: Trade-Ideas

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