Average Daily Trading Volume (ADTV): Definition, How To Use It

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Average Daily Trading Volume (ADTV): Definition, How To Use It

What Is Average Daily Trading Volume (ADTV)?

The average daily trading volume (ADTV) of a stock is the number of shares traded in a single day. The daily volume is the number of shares traded every day, however this may be averaged across a number of days to get the average daily volume. Because high or low trading volume attracts various sorts of traders and investors, average daily trading volume is an essential measure. Many traders and investors prefer greater average daily trading volume versus low trading volume since it is simpler to enter and exit positions with higher volume. Low volume assets have fewer buyers and sellers, making it more difficult to enter or leave at a desirable price.

Key Takeaways

  • The daily trading volume is the number of shares traded every day. Typically, the average daily trade volume is estimated during a 6-month period.
  • Add together trading volume over the previous X days to calculate average daily trading volume. The sum should then be divided by X. For example, to calculate the 20-day ADTV, add the latest 20 days of trade volume and divide by 20.
  • Significant volume spikes indicate that something is happening in the stock that is garnering greater attention. Depending on the direction of the price, this might be bullish or bearish.
  • Dropping volume indicates decreasing interest, but even declining volume is helpful because when stronger traffic returns, there is sometimes a big price surge as well.

What Does Average Daily Trading Volume (ADTV) Tell You?

When average daily trading volume (ADTV) substantially rises or declines, it indicates that there has been a significant movement in how people value or regard the asset. Higher average daily trading volume usually indicates that the security is more competitive, has smaller spreads, and is less volatile. Stocks are less volatile when their average daily trading volume is greater, since significantly bigger deals would be required to alter the price. This is not to say that a stock with significant volume would not have substantial daily price movements. Any stock might see a significant price shift on a single day (or numerous days) on higher-than-average volume.

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The average daily trading volume is a popular securities trading metric and a good indicator of a security’s overall liquidity. The greater a security’s trading volume, the more buyers and sellers there are in the market, making it simpler and quicker to complete a deal. Transaction costs are expected to rise in the absence of adequate market liquidity (due to larger spreads).

The average daily trading volume of any liquid asset is a valuable instrument for understanding its price activity. If an asset’s price is rangebound and a breakthrough occurs, rising volume tends to confirm the breakout. A lack of volume suggests that the breakout may fail.

Volume also aids in the confirmation of price swings, whether upward or down. Volume should increase when there is a substantial price push up or down. If it isn’t, there may not be enough demand to keep driving the price up. If there is insufficient interest, the price may fall.

During trends, low volume pullbacks tend to favor the price ultimately going back in the current direction. In an upswing, for example, volume will typically increase while the price is increasing rapidly. If the stock falls and volume is modest, it indicates that there is little selling interest. If the price begins to rise on larger volume again, it may be a good time to buy since both price and volume are confirming the uptrend.

When volume is far above normal, it may sometimes signify the end of a price move. Because so many shares have changed hands in a certain price range, there may be no one else to jump in and continuing driving the price in that direction. Strong price movements accompanied by steep volume increases are often indicators of an impending price reversal.

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Average Daily Trading Volume (ADTV)

Example of How to Use Average Daily Trading Volume (ADTV)

Image by Sabrina Jiang © Investopedia2020

A volume window is located at the bottom of the chart. The red and green bars represent daily volume, while the black line represents the average volume for the last 20 days. The average is less impacted by single-day occurrences and provides a better indication of whether general volume is increasing or decreasing.

On the left side of the chart, there is a resistance area. On growing volume, the stock breaks above it, confirming the price climb and breakout. With the exception of one high volume day, the price consolidates after the breakthrough. However, average volume is falling during the consolidation/pullback, indicating that there is minimal selling pressure. On heavy volume, the price breaks out higher again, confirming another increase.

The price attempts to rise, but neither volume nor price follow through. As the price begins to fall, so does the volume. This suggests that there is significant selling pressure and that the price may continue to decrease.

The Difference Between Average Daily Trading Volume (ADTV) and Open Interest

Volume and open interest are often conflated. The average daily trading volume is the number of shares (stock market) or contracts (futures and options market) that are traded in a given day. The phrase “open interest” in futures and options refers to how many contracts are open but have not yet been closed. The two measures are diametrically opposed. Volume is the total number of contracts that change hands. Open interest analyzes the amount of contracts that remain initiate by measuring how many transactions were utilized to open or terminate positions.

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Limitations of Using Average Daily Trading Volume (ADTV)

Average daily trading volume is a popular indicator for analyzing if a stock fits an investor’s or trader’s trading standards. However, ADTV is mediocre. On any particular day, an asset might depart from the average, creating much more or less volume.

In addition, the average might change over time, increasing, dropping, or fluctuating. As a result, check volume and average volume on a frequent basis to ensure that the asset remains within the volume boundaries you wish for your trade.

Significant variations in volume may indicate that something has changed inside the asset, and these changes might be negative or positive. Volume will not tell you which it is, but it will indicate that more investigation or action may be necessary.

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