What is
Relative Volume
in Stocks?
Volume is a key metric that every trader should be aware of.
While trading volume on its own is informative, relative
volume is particularly important for trading. Relative volume
can indicate when trading interest in a stock is high or low and
it may provide signals about liquidity and volatility.
In this guide, we’ll explain what relative volume means for
stocks and why traders should pay attention to relative
volume.
What is Volume in Stocks?
Trading volume in stocks is a measure of how many individual
shares of stocks are traded over a particular period of time.
Volume is usually measured on a daily basis, but it can also be
measured hourly or monthly.
There are also alternative measures of volume, such as the
number of trades placed in a stock or the total dollar-volume of
a stock traded. Looking at the total number of trades can be
useful if a few large trades are driving share volume higher.
The dollar-volume of a stock traded can be useful for
comparing volume across stocks that have different prices per
share.
What is Relative Volume in Stocks?
Relative volume compares the current trading volume in a
stock to the trading volume over a specific reference period. For
example, relative volume might compare the current day’s
trading volume to the average daily trading volume over each
of the past 10 days. In that case, relative volume would be
calculated as:
Relative Volume = Current Day’s Volume / (Total 10-day
Volume / 10)
Or, more generally:
Relative Volume = Current Volume / Average Volume
If a stock’s relative volume is greater than 1, it means that the
current day’s trading volume is greater than the average
volume over the past 10 days. A relative volume of 5, for
example, means that the current trading volume is 5 times
greater than the average volume.
If its relative volume is less than 1, it means that the current
day’s trading volume is less than the recent average for that
stock. A relative volume of 0.5, for example, means that the
current trading volume is half as much as the average volume.
Why Does Relative Volume Matter?
Relative volume is important for traders because it provides
important insight into what’s happening in the market for a
stock. There are 3 main pieces of information that relative
volume provides.
Liquidity
In general, greater trading volume means that there is more
liquidity in a stock. So, high relative volume (that is, relative
volume significantly greater than 1) signals that a stock is
likely to be highly liquid. On the other hand, low relative
volume (significantly less than 1) means that there may be
little liquidity in a stock.
This is important for traders because liquidity is essential to
moving in and out of positions quickly at favorable prices.
Stocks with low liquidity – which may be signaled by low
relative volume – may have high bid-ask spreads and it is
possible to be unable to exit an open position.
Relative Trading Interest
Relative volume also provides information about the interest in
a stock among traders. High relative volume signals that there
are more shares of a stock being bought and sold than is
typical.
Unusually high interest in a stock is often preceded by a
catalyst, such as an earnings report, market news, or insider
buying and selling. These catalysts can provide opportunities
for trading, and searching for stocks with high relative volume
is one way to find them.
Volatility
High relative volume can also be an indicator of brewing
volatility. For example, say a stock typically moves up or down
$0.50 in a day on 1 million shares of volume. If on another day
5 million shares of the same stock are traded (a relative volume
of 5), that could move the stock $2.50 in one direction.
Importantly, high relative volume doesn’t necessarily cause
increased volatility. Trading volume accounts for both the
buying and selling of shares, so any price movement will
depend on the balance of buyers and sellers in the market for
that stock. By the same token, a relative volume of 5 could see a
stock move $2.50 in one direction, or it could see the same
stock move $5.00 in one direction.
Additional Considerations around Relative
Volume
An important thing to keep in mind when evaluating relative volume is that it looks only
at the total number of shares being traded. It does not take into account who is trading
those shares or whether trading volume is being inflated by a small number of very large
trades. It’s a good idea to also compare the number of trades against the average number of
trades in a stock to check whether volume is being affected by institutional block trades.
As we noted above, relative volume also doesn’t provide information about the balance of
buyers and sellers for a stock. Relative volume can be associated with high volatility if
buyers and sellers are unbalanced, or it can be associated with very little volatility if buyers
and sellers are equally matched.
Conclusion
Relative volume is an important tool that traders can use to quickly evaluate whether
trading interest in a stock is above or below average. Stocks with high relative volatility
may offer more opportunities for trading, especially if there is an associated increase in
liquidity and volatility.
Relative Volume Definition:
Relative Volume (often times called RVOL) is an indicator that tells traders how
current trading volume is compared to past trading volume over a given period.
It is kind of a like a radar for how “in-play” a stock is.
The higher the relative volume is the more in play it is because more traders are
watching and trading it.
As traders, this is what we want.
Stocks that have a lot of volume have more liquidity and tend to trade better than stocks
with low relative volume.
The RVOL is displayed as a ratio.
So if it is showing 3.5 relative volume, that means it is trading at 3.5 times its normal
volume for that time period.
As day traders we like to see RVOL at 2 or higher with a positive catalyst, low float and
ideally a higher short interest.
When all this falls in line together we have a recipe for parabolic moves that can make
trading months and sometimes even years.
This is also a good metric to watch for potential bottoming or topping in stocks.
As a stock gets oversold or overbought we want to look for volume to get a spike in
relative volume which would indicate that buyers and seller are fighting over an
important support or resistance level and will likely reverse.
Warrior Trading Pro Tip
RVOL is often overlooked, especially by new traders, but it is important to understand
this metric and to add it into your morning preparation.
Knowing what other traders are watching and trading is key to understanding what
stocks are in play and which ones will likely make big moves.
GLBS Relative Volume
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.
This is what we like to see in a stock to confirm that a lot of traders are watching it and
that it is “in play”. Trading stocks out of play means there will be less traders watching
it and will likely result in false breakouts or choppy price action with less predictable
moves.
Also, with higher relative volume you will have more liquidity in the stock which will
tighten spreads and allow you to trade with more size without a ton of slippage.
Relative Volume Trading Strategy
Relative volume is a great indicator to keep a close eye on, but like most indicators it
works best in conjunction with other indicators and on different time frames.
For example, I like to see how the RVOL is compared to previous trading days but I also
like to check it versus opening drives and second leg drives to compare strength.
NVDA Relative Volume
In the 1-minute chart of NVDA you will see that it had a very strong opening drive.
After a strong move like that I like to see it have a pull back to support or the VWAP on
lighter volume before making another leg up.
In this case, it came back to support at $97.75 where it consolidated in a tight wedge
pattern before breaking out to the upside. The key to this strategy is on the breakout that
is marked by the green arrow.
This is where you would look to get long but only if volume confirms the move. You can
see at the bottom of the chart that volume spiked when it broke out of the pattern and
held above the resistance line.
This is a great indication that buyers want to take prices higher with a great
risk/reward entry.
What’s a Good Relative Volume Ratio?
During premarket, I look for stocks
that have traded at least their average
volume. By the time the market opens,
I’ve narrowed it down to stocks that
have a relative volume ratio of
at least 4.
That means I’m looking for stocks that have traded at least four times their average
volume. If they’ve rotated their float already, all the better.
What Is a Low Relative Volume Ratio?
Any stock with a relative volume ratio of less than 1 just isn’t worth my time…
That means if a stock’s average volume is 100,000 shares, I want it to trade at least
100,000 shares in premarket. But I’d still like to see it trade three or four times that —
meaning 300,000 to 400,000 shares.
Anything less than that isn’t volatile enough for my taste.
How to Use Relative Volume in Your Trading Strategy
A key part of any trading strategy is finding the right stocks to trade.
While basic relative volume won’t be of much use in taking a trade, it’ll help you find
stocks that are in play. Then you can build a strategy around what you find.
A Momentum Trading Strategy Using Relative Volume
Here are some key ingredients for a short squeeze. Now, the presence of all these things
doesn’t guarantee a short squeeze. Nothing’s guaranteed in trading. But these factors
can increase the odds of a HUGE move.
You’re looking for a stock that…
Has a high relative volume ratio…
Is a low float stock…
Has a history as a former runner…
Is in a hot sector…
And has high short interest…
From there, I like to watch for my favorite patterns — the dip and rip, the VWAP-hold,
high-of-day break, and the weak open red-to-green.
Building a Relative Volume Scanner Using StocksToTrade
StocksToTrade doesn’t have a built-in RVol scanner, but it does have an easy way to
build custom scans. It’s simple to add relative volume to any scan you customize.
Open any scan you’ve built or start a new one. Add the Volume block. Inside the
Volume block, set your parameter to Criteria. In the drop-down menu, go to Liquidity,
then Average Volume, and select your preferred period.
From there, you can set your scanner to find stocks that have a high volume ratio.
Remember to use the % (percent) option and keep in mind that every 100% will equal
one.
Here’s an example of a relative volume block that will scan for a relative volume of 10 or
more, using the 60-day average volume.
Relative Volume Scanner Code Block, courtesy of StocksToTrade
Relative Volume — The Hard Way
I won’t go too in-depth here, because this is pretty advanced. But there’s a school of
thought you should know about. It’s based on the intraday volume distribution curve…
Intraday Volume Distribution Curve
For the most part, stocks tend to follow a volume curve throughout the day. Different
time periods see different kinds of action.
The morning is the busiest period, in the first hour of the day. Then there’s a midday
lull, followed by an afternoon push.
How to Calculate Relative Volume the Hard Way
Some traders use the intraday volume curve in their relative volume calculations…
You take the volume from a time of day and compare it to the presumed volume
based on the average.
I know. That’s a lot. Let’s break it down.
Say on average any stock trades 35% of its volume by 10:30 a.m. In this example, the
stock’s 60-day average volume is 100,000 shares. On any given day, at 10:30 a.m., that
stock should have traded around 35,000 shares (100,000 x 0.35 = 35,000).
Let’s say this company knows how to play the game. You see it put out a press release at
8:30 a.m., and the stock has some attention. By 10:30 a.m., the stock has traded 350,000
shares.
The relative volume in this example would be 10 at 10:30 a.m. That’s 350,000 at 10:30
a.m. divided by the presumed average volume at 10:30 a.m.
Conclusion
As you can see, you don’t have to be a math genius or a programmer to benefit from
relative volume.
In fact, you can often tell at a glance how liquid a stock is. With a few brief calculations,
you can decide which stock may have the most eyes on it.
If you like the more calculation-intensive approach, it’s there for you. But if you ask
me, it’s better to keep it simple. That’s my top tip for every trader.
Look for ridiculous volume and wait for those breakout patterns…