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

What is the relative volume indicator (RVOL)?

The relative volume (RVOL) indicator is a measure of the current volume traded in a share compared to the average level of volume traded over a specified period of time.

Volume is an extremely 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 typically 5, 10, 30 and 60-day periods are used.

When the RVOL is high, it indicates increased liquidity in company shares relative to recent trading. When liquidity is high in shares, it's more likely that the shares will have sharp movements in size and frequency – at times of increased volatility, there are more trading opportunities. If the RVOL is low, it indicates lower liquidity. The RVOL should be used in conjunction with other technical tools to identify potential trading opportunities, like breakout shares.

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 share is 1.0, the formula indicates that the current volume trading is the same as its 10-day average volume. If the ratio is above 1.0, it indicates that the current volume trading is higher than its average volume over the last 10 days. Similarly, if the ratio is below 1.0, it indicates there is lower volume trading than the 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 share with high relative volume indicates increased interest in it, 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 share is 'in play' and attractive to trade. Earnings announcements, respected analyst upgrades or downgrades, social media activity, press releases, index rebalances and geopolitical events can all cause increases in volume traded and RVOLs to become elevated.

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

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

For example, monitoring support and resistance levels or using Bollinger Bands and other technical analysis tools to identify breakout levels and momentum trading opportunities. Traders also look for high short interest and low free float in shares, as these factors may exacerbate the move.

Higher RVOL indicates increased liquidity in a share, 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 share seems to break out, momentum might not be sustained – the price could revert back to its usual range. A false breakout, or a failed breakout, is a market movement that occurs when an asset’s price moves above the resistance level or below the support level, but ends up reversing to its normal price range. This is one of the reasons why it’s important to always manage your risk carefully, especially during times of high volatility.

How to use the relative volume indicator in trading

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

Besides purchasing shares outright, you can trade them using CFDs – short for 'contracts for difference' – with us. CFDs are leveraged products. This means you don't own the underlying asset, but you're speculating on its price movement. Your currency exposure and initial margin will vary according to the share chosen. Your potential profits or losses will depend on the outcome of your prediction – they’re calculated against your full position size, not your margin requirement. Due to leverage, trading CFDs comes with a high risk of losing money rapidly.

The relative volume indicator summed up

• The relative volume (RVOL) indicator is the measure of the current volume traded in a share 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
• The RVOL indicator is typically used in conjunction with other technical indicators to identify trading opportunities

¹ CFD taxation on gains and losses – Australian Government