What is the relative volume indicator and how do you use it when trading?

What is the relative volume indicator ?

The relative volume indicator (RVOL) is a measure of the current volume traded in a stock compared to the average level of volume traded over a specified period of time. A high relative volume indicates increased liquidity, potential for higher volatility and an increased number of trading opportunities.

Volume is an important indicator in trading. It refers to the quantity of a particular asset traded over a period of time, and is usually measured on a daily basis. The time period used to calculate the past average daily volume can be any period you like, but the periods that are typically used are five, ten, 30 and 60 days.

When the RVOL is high, it indicates increased liquidity in a stock relative to its recent trading. When liquidity is high in a stock, it's more likely that the stock will move sharply in one direction or the other. At times of increased volatility, there are more trading opportunities created. The RVOL should be used in conjunction with other technical tools to identify potential trading opportunities, like breakout stocks. If the RVOL is low, it indicates lower interest than normal in trading the stock, reducing the likelihood of increased volatility and an outsized move.

How is the RVOL calculated?

The RVOL is calculated by dividing the security's current volume by the volume over a specified time period. The formula used is: relative volume = current volume / average volume.

If we assume the specified time period is 10 days and the RVOL ratio for a stock is 1.0, the formula indicates that the stock’s current trading volume is the same as the stock's 10-day average volume. If the ratio is above 1.0, it indicates that the current volume trading is higher than the stock’s average volume over the last 10 days. Similarly, if the ratio is below 1.0, it indicates that the stock’s trading volume is lower than its average from the past 10 days.

Imagine that Tesla's 10-day average trading volume is 150 million shares per day. The current volume is 150 million shares, so the RVOL ratio is 1.0. If some important news is released and the current volume increases to 300 million shares, the RVOL indicator would be 2.0 – twice the 10-day average volume. If on a quiet trading day, however, the current volume is only 75 million shares, the RVOL indicator would be 0.50 – half the 10-day average volume.

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How does the relative volume indicator work?

A stock with high relative volume indicates increased interest in the asset, which makes it worth monitoring in case a trading opportunity appears.

Some traders look for the RVOL to be at least above 2.0 or double the normal average volume to indicate the stock is 'in play' and attractive to trade. Factors that can cause increases in volume traded and RVOLs include earnings announcements, respected analyst upgrades or downgrades, social media activity, press releases, index rebalances and geopolitical events.

Traders will look at pre-market volume to see which stocks may already be trading at high volumes. Those with the highest relative volume indicators are potentially in play and worth a closer look.

Using other technical indicators in conjunction with the RVOL indicator can be useful for identifying trading opportunities. A stock can have high relative volume for one or even several days, but still have a limited move in its price because the buyers and sellers are more or less equally matched. However, elevated volume may indicate that the stock price is about to have a larger price move.

By monitoring support and resistance levels or using Bollinger Bands and other technical analytical tools, traders can identify breakout levels and momentum trading opportunities. Traders also look for high short interest and low free float in stocks, as these factors may exacerbate the move.

Higher RVOL indicates increased liquidity in a stock, enabling traders to enter and exit positions quickly without impacting the price. Experienced traders may look to implement a scalping strategy to take advantage of the high RVOL.

Even if the RVOL is high and the stock breaks out above key technical levels, it's not always right to buy the stock. It could be a false breakout or a 'pump and dump scheme', where stock prices look like they are moving higher but end up reversing by the end of the day. That's why it's always important to manage your risk carefully, especially during high volatility.

How to use the relative volume indicator when trading

1. Do research on relative volume indicators
2. Open a CFD trading account or practise with a free demo account
3. Find a market to trade and choose whether you want to 'buy' to go long
   or 'sell' to go short
4. Choose your position size and manage your risk
5. Open and monitor your position

You can trade on shares using CFDs – short for 'contracts for difference’ – with us. You’ll trade this financial derivative using leverage, which means you’ll open a trade at a percentage of the full value – but you can gain or lose money much faster than you might expect. You can even lose more than your initial deposit, as potential profits and losses are magnified to the total position size. So, it’s important to manage your risk carefully.

The relative volume indicator summed up

• The relative volume indicator (RVOL) is the measure of the current volume traded in a stock compared to the average level of volume traded over a specified period of time
• A relative volume indicator above 1 indicates increased volume in relation to its average trading volume, while a RVOL below 1 indicates a lower-than-average trading volume
• A high RVOL indicates increased liquidity and the possibility of higher volatility, which creates more trading opportunities
• You should use the RVOL with other technical indicators to identify trading opportunities