What is the relative volume indicator and how do you use it when trading?
The relative volume indicator measures volume traded in a stock relative to average volume traded over time. A high relative volume indicates more liquidity, higher volatility potential and trading opportunities. Learn more below.
What is the relative volume indicator (RVOL)?
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.
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 five,10, 30 and 60-day periods are used.
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 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 the stock, 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. 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 will look at pre-market volume to see which stocks may already be trading 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 equally matched. However, elevated volume may indicate that the stock price is about to have a larger price move. The buyers or sellers may appear to be evenly matched, but this could change if the buyers or sellers complete their order – which may lead to a market imbalance and a sharp 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 is 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 is why it is always important to manage your risk carefully, especially during high volatility.
How to use the relative volume indicator in trading
- Do your research on relative volume indicators
- Decide whether you prefer to use a spread betting or CFD trading account
- Open a trading account or practise with a free demo account
- Select your share and choose whether you want to 'buy' to go long or 'sell' to go short
- Choose your position size, place the trade and manage your risk
Learn about the differences between spread betting and CFD trading
Spread betting has certain advantages. You can choose a certain amount per point movement using spread bets. This gives you more control over your position size and currency exposure. Spread bets are popular with traders because all your profits are tax free, and there is no stamp duty or commission payable.*
All spread bets are leveraged, which means you'll only pay a fraction of the full value size to open a position. Note that your potential profits and losses will be amplified, as they're calculated based on full position size, not just the margin – so you could lose more than your initial deposit. That's why you need to take steps to manage your risk.
You can also trade shares using CFDs – short for 'contract for difference'. Like spread bets, CFDs are leveraged products. This means you don't own the underlying asset, but you're betting on its price movement. Your currency exposure and initial margin will vary according to the share chosen.
Similar to spread bets, your wins or losses will depend on the outcome of your prediction. CFDs are popular with traders because you can offset losses on CFDs against profits for capital gains tax purposes.*
* Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
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
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