Average Daily Trading Volume (ADTV)

The number of shares of a given stock that change hands on average within a single trading day is referred to as average daily trading volume (ADTV) by investors. It’s also the average number of stocks traded over a given time period. The average daily volume can be calculated by averaging the number of shares exchanged per day over a number of days. ADTV can be measured for any time period (five days, ten days, etc.), but the average trading volume for a period of 20 or 30 days is a widely used ADTV metric. The figuring is very straightforward, simply partition the quantity of offers by the quantity of exchanging a predefined period. Daily volume is the absolute number of offers exchanged one day.

The average daily trading volume (ADTV) is an important metric since different types of traders and investors are drawn to different levels of trading volume. The liquidity of a stock is linked to trading activity. The average daily value indicator is an alternative to the average daily trading volume indicator. All things considered, exchanged day by day. Numerous merchants and financial backers lean toward higher normal every day exchanging volume contrasted with low exchanging volume, in light of the fact that with high volume it is simpler to get into and out positions. Since low-volume assets have fewer buyers and sellers, it may be more difficult to enter or exit at the desired price.

Example of Average Daily Trading Volume (ADTV)

As a result, the daily average trading volume has a major effect on the stock price. When trading volume is poor, for example, the stock is cheaper because there aren’t many buyers or investors willing to purchase it. Some traders and investors prefer higher average daily trading volume because it allows them to reach positions more quickly. Huge deviations from the ADTV as a rule show more noteworthy or lesser purchasing or selling revenue in the stock from huge institutional financial backers. Large volume changes indicate that something in the stock is shifting and drawing more attention. Depending on which way the market is going, this may be bullish or bearish.

For investors, average trading volume is a key indicator of liquidity as well as market support and resistance levels. Declining volume suggests that demand is waning, but even declining volume is useful because when higher volume returns, it also correlates with a strong price drive. Since the average daily trading volume incredibly affects the stock value it is critical to realize the number of exchanges were on a specific offer. A similar offer can be exchanged ordinarily, back and forth and the volume is depended on each exchange, every exchange.

When the average daily trading volume (ADTV) significantly rises or falls, it indicates a significant change in how people value or view the asset. Generally, higher average daily trading volume implies that the security is more serious, has smaller spreads and is ordinarily less unstable. The formula for calculating the average daily trading volume (ADTV) of a stock is very simple. Traders and investors simply divide the overall trading volume for each day over the time period they want to calculate the average volume by the number of trading days in that period. The total volume of a stock exchanged during each trading day is information that can be obtained for free from almost any stock trading or information center, such as their brokerage account or financial market information providers like Marketwatch, Google Finance, or Yahoo Finance.

ADTV for x days = Total Volume Traded During x Days / x

Where,

 x is the number of days traders/investors want to calculate the average daily volume for (e.g., to get the 20-day average trading volume, x would equal 20)

Since much larger trades will be needed to influence the price, stocks with higher average daily trading volumes appear to be less volatile. This isn’t to say that a stock with a lot of volumes won’t have major regular price swings. On any single day (or over numerous days) any stock could have an exceptionally enormous value move, on higher-than-normal volume. At the point when the normal day-by-day exchanging is low dealers need to view at that stock as amazingly unpredictable. Yet, the inverse is with higher volume. Since it has smaller spreads and is less volatile, such stock is easier to trade. To reiterate, a stock with a higher trading volume is less volatile because traders must conduct multiple transactions in order to influence the price.

A high average trading volume, on the other hand, indicates greater interest in the stock and is commonly interpreted as indicating that many investors expect the stock will appreciate in value over time. The average daily trading volume of any liquid commodity is a valuable tool for assessing price behavior. In the event that the cost of a resource is rangebound and a breakout happens, expanding volume will in general affirm that breakout. An absence of volume shows the breakout may fizzle. It is additionally a sign of how fluid the exchanging a stock is. Liquidity is important to investors because it influences the bid and ask spread in stock prices, indicating how quick or difficult it is to enter or exit a position in the stock at an investor’s desired price.

Likewise, when the average trading volume is high, exchanges are executed without any problem. It will ascend alongside the stock value’s ascent. In this way, brokers can utilize it to affirm the stock value changes, regardless of in the event that it goes up or down. When volume is significantly higher than normal, it can signal the end of a price shift. Stocks with a high average trading volume, on the other hand, have narrower bid-ask spreads, making it easier for investors to join or exit trading positions at their desired price.

In the event that merchants are not intrigued by that stock, the volume is low and the stock will pullback. On the off chance that the value starts to rise once more, the volume will follow that ascent. Critical changes in volume regularly show to stock brokers value levels that address backing or opposition for a stock. However, ADTV is an average. On any given day, an asset’s volume will deviate significantly from the average, resulting in significantly higher or lower volume. All who is interested in that stock has already made as many trades as they want, and no one is able to drive the stock price higher. That often causes price reversal.

The average can likewise move over the long run, rising, falling, or swaying. In this way, screen volume and normal volume consistently to ensure that the resource actually falls inside the volume boundaries merchants want for their exchanging. If, on the other hand, a stock that has been falling in price for some time suddenly rises sharply and often shows a significant increase in trading volume, it means that large institutional investors, such as mutual funds or hedge funds, are purchasing the stock at that price level, indicating that it is a level of price support.

Information Sources:

  1. traders-paradise.com
  2. corporatefinanceinstitute.com
  3. investopedia.com