What is Average Daily Trading Volume (ADTV)?
Average daily trading volume (ADTV) is the average number of shares traded within a day in a given stock. Daily volume is how many shares are traded each day, but this can be averaged over a number of days to find the average daily volume. Average daily trading volume is an important metric because high or low trading volume attracts different types of traders and investors. Many traders and investors prefer higher average daily trading volume compared to low trading volume, because with high volume it is easier to get into and out positions. Low volume assets have fewer buyers and sellers, and therefore it may be harder to enter or exit at a desired price.
- Daily trading volume is how many shares are traded per day. Average daily trading volume is typically calculated over 20 or 30 days.
- Calculate average daily trading volume by adding up trading volume over the last X number of days. Then, divide the total by X. For example, sum the last 20 days of trading volume and divide by 20 to get the 20-day ADTV.
- Sizable volume increases signify something is changing in the stock that is attracting more interest. This could be bearish or bullish depending on which way the price is heading.
- Decreasing volume shows interest is waning, but even declining volume is useful because when higher volume returns there is often a strong price push as well.
What Does Average Daily Trading Volume (ADTV) Tell You?
When average daily trading volume (ADTV) increases or decreases dramatically, it signals that there has been a substantial shift in how people value or view the asset. Usually, higher average daily trading volume means that the security is more competitive, has narrower spreads and is typically less volatile. Stocks tend to be less volatile when they have higher average daily trading volumes because much larger trades would have to be made to affect the price. This does not mean a stock with high volume won't have large daily price moves. On any single day (or over multiple days) any stock could have a very large price move, on higher than average volume.
The average daily trading volume is an often-cited security trading measurement and a direct indication of a security's overall liquidity. The higher the trading volume is for a security, the more buyers and sellers there are in the market which makes it is easier and faster to execute a trade. Without a reasonable level of market liquidity, transaction costs are likely to become higher (due to larger spreads).
Average daily trading volume is a useful tool for analyzing the price action of any liquid asset. If the price of an asset is rangebound and a breakout occurs, increasing volume tends to confirm that breakout. A lack of volume indicates the breakout may fail.
Volume also helps confirm price moves either higher or lower. During strong price pushes up or down, volume should also rise. If it isn't, there may not be enough interest to keep pushing the price. If there isn't enough interest then the price may pullback.
During trends, pullbacks with low volume tend to favor the price eventually moving in the trending direction again. For example, in an uptrend, volume will often rise when the price is rising strongly. If the stock pulls back and volume is low, it shows that there isn't much selling interest. If the price starts to move up on higher volume again, that can be a favorable entry point as price and volume are both confirming the uptrend.
When volume is well above average, it sometimes indicates a climax of the price move. So many shares have changed hands in a certain price area that there may be no one else to step in and keep pushing the price in that direction. Steep price moves coupled with steep volume increases can often be a sign of an imminent price reversal.
Average Daily Trading Volume (ADTV)
Example of How to Use Average Daily Trading Volume (ADTV)
Along the bottom of the chart is a volume window. The red and green bars reflect daily volume, while the black line is the 20-day average volume. The average is less affected by single day events, and is a better gauge of whether overall volume is rising or falling.
The chart shows a resistance area on the left. The stock breaks above it on increasing volume, which helps confirm the price rise and breakout. After the breakout, the price consolidates and volume is quite low, except for one high volume day. Overall though, the average volume is declining during the entire consolidation/pullback, showing there is little selling pressure. The price breaks out higher again on strong volume, confirming another advance.
The price tries to move higher, but volume and price don't follow through. As the price starts to decline volume increases. This indicates there is lots of selling pressure and that the price could continue to fall.
The Difference Between Average Daily Trading Volume (ADTV) and Open Interest
Volume is sometimes confused with open interest. Average daily trading volume is the average of how many shares (stock market) or contracts (futures and options market) change hands in a day. Open interest is a futures and options term that describes how many contracts are open, that haven't yet been closed. The two measurements are quite different. Volume is the raw amount of how many contracts change hands. Open interest measures how many transactions were used to open or close positions, and thus tracks the number of contracts which remain open.
Limitations of Using Average Daily Trading Volume (ADTV)
Average daily trading volume is a commonly used metric and is useful for determining if a stock meets an investor's or trader's trade parameters. ADTV is an average, though. On any given day an asset can deviate from the average, producing much higher or lower volume.
The average can also shift over time, rising, falling, or oscillating. Therefore, monitor volume and average volume regularly to make sure that the asset still falls within the volume parameters you desire for your trading.
Significant changes in volume may signal that something has changed within the asset, and these changes may be unfavorable or favorable. Volume won't tell you which it is, but will let know that some further research or action may be required.