how average daily trading volume is used in trading
traders and investors alike pay close attention to adtv because it provides valuable information about the liquidity and market interest in a particular security the key uses of adtv are as follows image by sabrina jiang investopedia 2023illustration of adtv usein this hypothetical situation a stock trader has analyzed general electric ge and decides based on fundamental and technical analysis that ge is a trading opportunity it should also be noted that this trader is working for a 1 billion hedge fund the trader is constrained by a limit that permits trading only up to 10 of the value of shares traded in any stock this limit is set to avoid affecting the price of the stock the maximum allocation for ge for this hedge fund is 5 million while the minimum allocation for ge is 250 000 the image shows the candlestick chart of ge from early june 2022 to the middle of march 2023 the adtv is represented by the blue line across the volume section tradingviewon june 10 2022 the adtv for ge is 7 39 million shares which is equals approximately 404 8 million in shares traded overall ge is a suitable trading opportunity for the hedge fund as the adtv is well above the stock s maximum allocation the trader assesses the liquidity and volume volatility of ge and decides to enter the position when the volume traded crosses above the adtv this is to ensure that the trades will be executed seamlessly and that the trade won t impact the stock price significantly this occurs at point 1 on the chart where 23 12 million shares were traded at an approximate value of 1 29 billion the closing price of ge at point 1 is 55 80 a share this volume crossed above the adtv which was 8 81 million or about 4 92 million the trader takes a 0 10 of fund size position in ge which is about 1 million this is below the 10 trading constraint exceeds the minimum allocation of 250 000 and is also below the 5 million maximum allocation point 2 presents a second opportunity to acquire ge where there was another adtv crossover the trader takes another 1 million position in ge to reduce the average acquisition price of the current ge position as well as to take advantage of the above average liquidity in the stock the closing price of ge at this time was 51 81 over the next six months the price of ge rallies ge stock reaches a price of about 84 71 which is 57 44 higher than the average closing prices at points 1 and 2 the stock trader has more than 50 in unrealized gains from the initial positions at point 3 the trader decides to exit the ge trade the trade execution was based on the volume crossover on the adtv as well as the fact that the trading amount of approximately 3 2 million was within the trading limits of the fund this is because at point 3 28 59 million shares were traded at an approximate value of 2 62 billion risk was also managed by using the trading limit along with the adtv crossover allowing the stock trader to easily exit the position this example was for illustrative purposes only and is not a recommendation to buy or sell ge stock also the criteria for trading limits as well as adtv are purely for illustration the difference between average daily trading volume adtv and open interestvolume 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 6volume 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 the two measurements are quite different limitations to 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 either unfavorable or favorable volume won t tell you which it is but will let know that some further research or action may be required 