Average daily trading volume - definition of ADTV
What is the average daily trading volume (ADTV)?
Average Daily Trading Volume (ADTV) is the average number of shares traded during a day in a given stock. Daily volume is the number of stocks traded each day, but this can be averaged over a number of days to find the average daily volume. Average daily trading volume is an important metric because high or low trading volume attracts different types of traders and investors. Many traders and investors prefer a higher average daily trading volume compared to a lower trading volume, because with a large volume it is easy to enter and exit positions. Low-volume assets have fewer buyers and sellers, and therefore it can be difficult to enter or exit at the asking price.
Main takeaways
Daily trading volume is the number of shares traded per day. The average daily trading volume is usually calculated over 6 months. 1
Calculate the average daily trading volume by adding the trading volume over the last X number of days. Then divide the total by X. For example, add up the last 20 days of trading volume and divide it by 20 to get the 20-day ADTV.
Large increases in volume indicate that something changes in inventory attracts more attention. This may be bearish or bullish depending on the direction the price is heading.
Decreasing volume shows that interest is diminishing, but even decreasing volume is beneficial because when larger volume returns, there is often a strong price push as well.
What does the average daily trading volume (ADTV) tell you?
When the average daily trading volume (ADTV) increases or decreases significantly, it signals a significant shift in how people value or see an asset. Higher average daily trading volume usually means that security is more competitive, has tighter spreads and is usually less volatile. 2 Stocks tend to be less volatile when they have higher average daily trading volumes because much larger trades must be made to influence the price.
This does not mean that oversized stocks will not have large daily price movements. On any one day (or over several days), any stock can have a very large price movement, on a volume larger than the average size.
Average daily trading volume is an often-cited safety trading metric and a direct indicator of the overall liquidity of securities. The higher the trading volume of securities, the more buyers and sellers in the market which makes executing a transaction easier and faster. Without a reasonable level of liquidity in the market, transaction costs are likely to rise (due to large spreads). 3
Average daily trading volume is a useful tool for analyzing the price action of any liquid asset. If the price of the asset is ranged and the breakout occurs, the volume increase tends to confirm this breakout. A lack of size indicates that the breakout may fail.
Volume also helps to confirm price movements either up or down. During a strong price rush up or down, volume should also rise. If not, there may not be enough interest to keep paying the price. If there is not enough interest, the price may fall back.
During trends, low-volume pullbacks tend to favor the price eventually moving in the direction of the trend again. 4 For example, in an uptrend, volume often rises when the price rises strongly. If the stock falls back and the volume is low, this indicates that there is little interest in selling. If the price starts to rise when volume rises again, it could be a favorable entry point as price and volume confirm the uptrend.
When the volume is much above average, it sometimes indicates the peak of price action. Many stocks have been traded in a certain price zone so that no one else intervenes and continues to push the price in that direction. Sharp price movements along with sharp increases in volume are often a sign of an impending price reversal.
Difference between average daily trading volume (ADTV) and open interest
Sometimes size is confused with open interest. The average daily trading volume is the average number of stocks (stock market) or contracts (futures and options market) traded per day. Open interest is a future and options term that describes the number of open contracts that have not yet been closed. 6 measurements are completely different. Volume is the initial amount of the number of contracts traded. Open interest measures the number of transactions that were used to open or close positions, thus tracking the number of contracts that remain open.
Limits on the use of average daily trading volume (ADTV)
Average daily trading volume is a commonly used and useful metric to determine whether a stock meets an investor's or trader's trading criteria. ADTV is average, though. On any given day the asset can deviate from average, resulting in a much larger or smaller volume.
The average can also shift over time, high, fall, or swing. Therefore, monitor the size and average size regularly to ensure that the asset still falls within the size parameters you want for your trade.
Large changes in size may indicate that something has changed within the original, and these changes may be unfavorable or favorable. The size won't tell you what it is, but it will let you know that further research or action may be required.