Introduction
The knowledge on market indicators in the stock trading world can make the difference between success and failure. Relative Volume (RVOL) is one such indicator which is very powerful but not given much attention. In case you have been asking questions like what is relative volume in stocks, then you are at the right place. Relative volume or simply, it is a parameter which assists traders in determining the activity of a stock in relation to its average trading activity. This guide will discuss the meaning of relative volume, the computation of the relative volume, and how it is an essential tool to traders.
Before starting let me introduce steady income statements. We provide tips related to stock, investment ideas etc.
What is the Relative Volume of Stocks?
Relative Volume (RVOL) is a trading indicator which measures the trading volume of a stock against its average trading volume over a certain time frame which is normally a few days or weeks. It provides traders with information as to whether a stock is being actively or passively traded than normal.
Basically, relative volume displays the amount of focus that a particular stock is receiving within a particular time. To give some examples, a stock with a relative volume of 2.0 would be trading two times its usual volume and relative volume of 0.5 would be trading low to its average volume.
Relative volume: How to compute.
Relative volume is calculated as given below:
Relative Volume (RVOL) = Current Volume / Average Volume.
For example:
Assuming that on average 1 million shares are traded in a stock daily, but today 2.5 million shares have been traded in this stock, its relative volume will be:
RVOL = 2.5M / 1M = 2.5
It implies that the volume of the stock today has increased two and a half times. This ratio is used by traders to understand abnormal activity in the market which may be an indicator of significant news, investor feelings, or other developments in the price.
Why Relative Volume Matters
Now that we understand what the relative volume is in stocks, we are going to discuss the importance of the same.
1. Determining Market Interests.
High relative volume usually indicates that a stock is being given some attention that is not the usual one by the traders or investors. This may be because of earnings announcements, product announcements or unexpected news.
2. Identifying Trading Opportunities.
High-RVOL stocks have a tendency to move in sharp up or down direction. This gives day traders and swing traders a tremendous entry and exiting option.
3. Confirming Breakouts
When a stock finally breaks out of a major resistance level traders then seek good relative volume in order to ensure that the breakout is not just an illusion.
4. Avoid Low-Liquidity Traps.
Low relative volume may show lack of interest in a stock and hence lack of good liquidity and price slippage. This fact makes traders aware that they will not get stuck in illiquid positions.
How to Read Relative Volume
It is essential to know the principle of the relative interpretation of volume. Here’s a quick breakdown:
- RVOL less than 1.0: Unfavorable activity; traders can either avoid or buy or sell waryly.
- RVOL = 1.0: Ordinary trading.
- RVOL > 2.0: Fairly high interest, a possible break out or news-driven action.
- RVOL greater than 5.0: There is very high activity which is usually associated with significant catalysts such as earnings, news or market speculation.
A comparison of these numbers enables the traders to easily identify the direction of the action in the market.
Relative vs. Regular Volume.
Whereas volume is merely an indicator of the quantity of shares that have been traded within a certain period, relative volume puts the quantity into perspective.
An example is that a firm may trade in 500,000 shares every day. When it trades 700,000 shares one day that would not be interesting unless you know it typically does not trade so much. Relative volume provides that contextual understanding, to demonstrate whether current volume is really substantial.
Commodity Relative volume in the Trading Strategies.
Now, how are traders applying relative volume in the field:
1. Momentum Trading
Relative volume indicators are typically used by traders to find stocks that have high momentum. An increasing stock with an RVOL of over 2.0 tends to indicate that the buyers are strong willed and this can support the elevation.
2. News-Based Trading
RVOL soars when there are significant news releases such as earnings, mergers, or product releases. These surges are observed by traders as indicators of buying or selling trades.
3. Breakout Confirmation
When a stock breaks over a resistance level at a low RVOL, then it could be a false breakout. But when the RVOL increases dramatically then it is good indication of high participation and therefore the move is more dependable.
4. Reversal Signals
Higher RVOL in a falling market may also be an indication of capitulation where sellers are too tired and an impending turnaround may be close.
Relatively Volume showing tools and platforms.
The relative volume indicator is available on most trading platforms and stock screeners today. RVOL data are available on such popular platforms as:
- TradingView – Shows real time RVOL.
- ThinkorSwim (TOS) – Provides RVOL charts and custom alarm systems.
- Finviz – Enables the stock screeners to filter the stocks based on RVOL.
- Yahoo Finance / MarketWatch – Shows volume comparison metrics of daily activity.
These are tools that enable traders to determine with a speedy pace which stocks are experiencing unusual trading practices during any particular time.
Common Mistakes When Using Relative Volume
Although effective, RVOL is not flawless. The following are some of the pitfalls to be avoided:
- Ignoring Price Action: A stock can be of high relative volume and the price action does not bear out the strength or weakness, then the move can be deceptive.
- Not Checking the News: Never forget to check the cause of the increase of volume. It is sometimes because of insignificant factors such as a rumor that is temporary.
- Relying only on RVOL: Relative volume is most effective when it is used alongside the technical indicators such as moving averages, the RSI, and MACD to make a decision of more precise trading.
Relative Volume in Action.
Let us assume that Stock XYZ just trades about 1 million shares per day. This time 3 million shares have already sold in the first two hours of the session. Its RVOL is 3.0- triple the normal level.
This indicates high purchase or sales. A trader may then be able to analyze the chart and realize that the stock is breaking out of a resistance break with a good momentum. This validates the breakout and is an indication of a possible buy.
Advantages of Tracking Relative Volume.
- Helps recognize hot stocks of the day.
- Checks market opinion behind prices.
- Enhances the timing of the entrances and exits.
- Trades in all types of assets (stocks, ETFs, crypto).
- Filter fake breakouts and low volume traps.
Conclusion
This will provide traders a definite advantage of determining if there is substantial activity in the market with respect to relative volume in stocks. It is not about the volume of trading of a stock, but rather the comparisons between the normal functioning of the stock and the trading. High relative volume usually implies there is great interest in the stock by the investor, possible price action, and volatility, all of which is valuable to day traders, swing traders, as well as long-term investors.
To the point, relative volume is the pulse of market movement. Knowing how to read it efficiently, traders will be able to make smarter, quicker, and more sure decisions in every market environment.
