Average Daily Trading Volume (ADTV) is a technical indicator used by investors that refers to the number of shares of a particular stock that, on average, change hands during a single trading day. The average daily trading volume can be calculated for any span of time – five days, 10 days, etc. – but a commonly used ADTV measure is the average trading volume for a period of 20 or 30 days.
Average daily trading volume can be tracked for a single stock, for options on a stock, or for market indexes such as the S&P 500.
An alternative to the average daily trading volume indicator is the average daily value indicator. Average daily value is a computation of the average dollar amount of a stock that is, on average, traded daily.
Average Daily Trading Volume (ADTV) refers to the number of shares of a particular stock that, on average, change hands during a single trading day.
Significant deviations from the ADTV usually indicate greater or lesser buying or selling interest in the stock from large institutional investors.
Average trading volume is an important indicator of liquidity for investors and support or resistance price levels.
Formula for Average Daily Trading Volume (ADTV)
The formula for calculating the average daily trading volume of a stock is very simple. You just take the total trading volume for each day over the span of time that you want to compute the average volume for and divide that total by the number of trading days in that time span.
The total volume of a stock that is traded during each trading day is information that is freely available through virtually any stock trading or information center, such as your brokerage account or financial market information providers, such as Marketwatch, Google Finance, or Yahoo Finance.
Where x is the number of days you want to calculate the average daily volume for (e.g., to get the 20-day average trading volume, x would equal 20)
To make things even simpler, there are volume technical indicators available that you can attach to a stock chart and simply set for the number of days you want to calculate the average daily trading volume. The technical indicator will then do the average volume calculation for you, updating it each new trading day.
Why Volume of Trading is Important to Investors
1. Indicates the overall level of interest in a stock
Stock market investors track the average daily trading volume for several important reasons. The first is that trading volume is an indicator of the overall level of interest in a stock shown by all potential stock traders.
An extremely low average trading volume for a stock indicates that not many investors are following or interested in the stock and that few, if any, large institutional investors are committed to an investment in the stock. It usually indicates that the consensus opinion of market analysts is that the stock shows little probability for significant price appreciation.
Conversely, a high average trading volume shows greater interest in the stock and is generally interpreted as meaning that many investors believe the stock will rise in price over time.
2. Indicates the trading liquidity in a stock
Average daily trading volume is also an indication of how liquid the trading in a stock is. Liquidity is important for investors because it impacts the bid and ask spread in the price of stock and, thereby, indicates how relatively easy or difficult it may be to initiate or exit a position in the stock at an investor’s desired price.
Stocks with relatively low trading volumes attract higher bid and ask spreads, making it more difficult to enter or exit the stock at your desired price. In contrast, stocks with consistently high average trading volume offer tighter bid-ask spreads, making it easier for an investor to enter or exit trading positions at their desired price.
3. Indicates the price levels that represent support or resistance for a stock
Finally, significant changes in volume often indicate to stock traders price levels that represent support or resistance for a stock.
For example, assume that the 20-day average daily trading volume for a given stock is approximately two million shares per day as the stock’s price rises from $50 a share to $70 a share over the course of several months. Then, as the price nears and then reaches $70, it subsequently sells off sharply, falling back to $65 during a trading day when the trading volume is six million shares – three times the average. It would indicate that $70 represents a level of significant price resistance.
Alternatively, if a stock that’s been declining in price for some period of time suddenly rises sharply and also shows a large increase in trading volume, it indicates that large institutional investors, such as mutual funds or hedge funds, are buying the stock at that price level, thus making it a level of price support.
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