If you're looking for news featuring the $4 stock with an average daily volume of 89,000 shares a day, chances are that you won't find it in either the IBD Weekly newspaper or in key stock lists.
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Both price and volume are key factors that help fuel big moves in stocks. Let's focus first on volume.
Thinly traded stocks tend to be extremely speculative and unpredictable. Because there is such a limited number of shares, a large purchase by a mutual fund or another big investor can cause a huge spike in the price.
By the same token, if the investor decides to sell, the share price will likely tank. Neither scenario is ideal for individual investors. That's why IBD considers a stock that trades fewer than 400,000 shares per day, based on a 50-day average, as thinly traded.
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When scouring for watch-list candidates, keep in mind that price matters, too. Unscrupulous promoters of penny stocks can easily manipulate a stock trading less than $5 or $10 a share.
To reduce such risk, it's best to stick with stocks that have a minimum dollar volume of $20 million to $25 million. In fact, the more, the better. Institutions tend to get more involved in a stock with daily dollar volume in the hundreds of millions or more.
Apple (AAPL), currently a member of IBD Leaderboard, currently trades more than 31 million shares per day on average. That huge turnover hasn't stopped the stock from rallying more than 97% since the iPhone giant broke out in January 2017 and cleared a first-stage cup with handle with a 118.12 proper buy point.
You can calculate the dollar volume by multiplying the stock price by the average daily share volume. So a stock that trades at 60 and moves an average of 400,000 shares a day has a dollar volume of $24 million.
When Vipshop (VIPS) debuted on the NYSE on March 23, 2012, it was priced at 6.50 a share. At the one-year mark, the Chinese stock traded at 28.61 with a daily average volume of 374,800, for a dollar volume of $10.7 million. That would have been considered a highly speculative play.
But by the time the stock cleared a two-month base in July 2013, it was trading near 39 with average daily volume of 680,000. Dollar volume topped $26.5 million.
Vipshop rallied as mutual funds snapped up shares. At the end of Q2 2013, 80 funds owned 97 million shares. As of Q1 this year, 523 funds held 225 million shares.
Today, Vipshop is working on the right side of a gigantic bottoming base.
A version of this column was first published on June 2, 2015. Follow Gondo on Twitter at @IBD_NGondo for more on ETFs, growth stocks and stock market insight.
Generally speaking, a stock should have a 50-day volume trading average of 400k or more and a minimum of 20-million in dollar volume. If the dollar volume is even bigger—in the hundreds of millions—there is even less risk you'll end up holding the bag in a selloff.
It is recommended that day traders look for stocks with at least one million in volume. Higher volume also means it's easier to buy and sell stocks because more people looking to buy or sell. In a chart, you will typically find a volume bar chart at the bottom, as seen below.
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.
Any level of volume that provides investors with specific insight into a security's price action (and a sense of the trading interest in that security) can be thought of as a good trading volume.
To reduce such risk, it's best to stick with stocks that have a minimum dollar volume of $20 million to $25 million. In fact, the more, the better. Institutions tend to get more involved in a stock with daily dollar volume in the hundreds of millions or more.
Many long term investors, for example, institutional investors like mutual funds prefer stocks with higher volumes. Intraday traders, who have to square-off their position in a relatively much shorter time span, look for stocks with high trading volumes.
There are two most popular and widely used volume indicators: PVI (Positive Volume Index) and NVI (Negative Volume Index) that help in volume analysis. The positive volume index is used to measure the positive impact or increase in the trading volume.
As far as Nifty is concerned, it has traded in a PE range of 10 to 30 historically. Average PE of Nifty in the last 20 years was around 20.* So PEs below 20 may provide good investment opportunities; lower the PE below 20, more attractive the investment potential.
You can 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, add the last 20 days of trading volume and divide by 20 to get the 20-day ADTV.
Volume is an important indicator that every day trader should understand. Generally, you want to look for stocks that have high volume. Rising volume and price often mean buyer interest, which makes the stock more liquid, and quicker and easier to buy and sell.
High volume is usually considered to be 2 or more times the average daily volume over the last 50 days for that stock, however some traders might set the crireia to be 3x or 4x the ADV for confirmation of a particular pattern or event.
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Average daily trading volume, or ADTV for short, is a metric derived from the average number of shares traded per day during a specified time frame. It refers to the total US dollar value of stocks bought and sold on one side of a stock exchange in one day.
Presented as a red line, it is an indication of the moving average of shares traded over the last 50 trading sessions. When viewing a daily chart, this line represents a 50-day moving average volume level. This line is derived by summing the volume of the last fifty trading days and dividing it by fifty.
Average Daily Trading Volume Threshold means, with respect to any period, that the average daily trading volume of the Common Stock during such period as reported by Bloomberg, L.P. (or if such source ceases to be available, a comparable source selected by the Holder and acceptable to the Company in its reasonable ...
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