What is ADTV(average daily trading volume)?
One of the essential criteria in technical analysis is volume. Let’s look at how to compute the average daily trading volume, look at some instances, and see how to use it.
- What is ADTV or Average daily trading volume?
- Average daily trading volume (ADTV) formula
- Why is trading volume important to investors?
- Average daily trading volume limitations
What is ADTV or Average daily trading volume?
Investors refer to the number of shares of a specific stock that change hands on average during a single trading day as Average Daily Trading Volume (ADTV).
The average daily trading volume (ADTV) can be determined for five days, ten days, etc. The average trading volume for 20 or 30 days is a regularly used ADTV metric.
The average daily trading volume of a single stock, options on a stock, or market indexes like the Nasdaq 100 are all tracked.
The average daily value indicator is an alternative to the average daily trading volume indicator. The average daily value of a stock calculates the average dollar amount traded daily.
William O’Neil’s ‘How to Make Money in Stocks’ popularized the use of average volume as one of several data sources for investing decisions.
O’Neil emphasized the importance of paying attention to average daily trading volume for two reasons:
- Ensure that a stock is liquid enough to trade fast
- To ensure that stock traders’ present supply and demand are on your side
When a stock’s price declines, its daily volume should be lower than the usual daily volume, indicating that selling pressure is easing.
When a stock’s price has been consolidated and isn’t growing much, you would like to see increasing volume as the prices begin to rise, indicating more buyers are entering the market. When a stock’s price increases, you want the increased volume to suggest that it will continue to grow.
Average daily trading volume (ADTV) formula
The formula for calculating a stock’s average daily trading volume is exceptionally straightforward. Multiply the total trading volume for each day over the period you wish to compute the average volume by the number of trading days.
ADTV for α days = Total volume traded during a day / α
To make things even easier, you can use volume technical indicators to attach to a stock chart and choose the number of days you would want to estimate the average daily trade volume.
The technical indicator will calculate the average volume for you and update it every trading day.
Why is trading volume important to investors?
1. Indicates the amount of curiosity in a stock/ETF.
The average daily trading volume is essential to stock market participants. The foremost thing is that trading volume measures how much interest all prospective stock traders have in a specific stock.
A low average trading volume for a company suggests that few individuals are monitoring or interested in it and that few financial institutions are committed to a position.
It usually means that market analysts agree that the stock has a limited chance of appreciating significantly at a price.
2. Indicates the amount of trade liquidity available.
The average daily trading volume also indicates how liquid a stock/trading ETF is.
Liquidity is significant for investors because it influences the bid and asks spread in the price of a stock/ETF, indicating how simple or difficult it is to enter or exit a position in the stock/ETF at an investor’s desired price.
Stocks and ETFs with low trading volumes have wider bid/offer spreads, making it harder to enter or exit at the right price.
Stocks/ETFs with a high average trading volume, on the other hand, have narrower bid-ask spreads, making it more straightforward for investors to enter or leave trading positions at their preferred price.
3. Indicates whether a stock’s/ETF’s price levels offer support or resistance.
Finally, significant volume shifts frequently signal stock traders’ price levels that constitute support or resistance for a stock/ETF.
Average daily trading volume limitations
A typical statistic for determining if a stock fits an investor’s or trader’s transaction requirements is the average daily trading volume. However, ADTV is standard.
An asset’s volume can diverge significantly from the average on any particular day, resulting in much greater or lesser importance.
Over time, the average might change, rising, dropping, or oscillating. As a result, keep an eye on volume and average volume to ensure that the asset is still trading within the volume constraints you want.
Significant fluctuations in volume could indicate that something has evolved within the asset, which could be either positive or negative. The volume didn’t reveal to you which one it is, but it will alert you that more investigation may be needed.