Buy Signals Part 1 - High Volume

One of the first things I learned about picking individual stocks was the importance of volume.

Before joining Goat Academy, I assumed a company’s stock price was driven primarily by its financial health, earnings, and overall success. While those things certainly matter, I’ve learned that there is another powerful force at work: supply and demand.

A great company can have strong earnings and a promising future, but if investors aren’t interested in buying its shares, the stock price may not go anywhere. On the other hand, when demand for a stock suddenly increases, the price can move quickly.

That’s where volume comes in.

Volume: Seeing Supply and Demand in Action

Volume represents the number of shares bought and sold during a specific period. On a daily candlestick chart, volume is typically displayed as red or green bars along the bottom. When those bars suddenly become much taller than usual, it tells me that significantly more shares are changing hands.

Why Rising Green Volume Bars Get My Attention

When green volume bars begin getting taller, it can indicate that buying activity is increasing. In many cases, strong buying volume means that a stock is attracting significant buying interest from large institutional investors and may be preparing to move higher. Conversely, declining or red volume bars can signal that a stock that is moving sideways or losing momentum as buying decreases or selling increases.

Looking for Relative Volume

Because of this, volume has become an important part of my stock-screening process. One measure I look at is relative volume, or RVOL. I generally look for stocks that are breaking out with relative volume greater than 1, meaning the current trading volume is more than twice its 30-day average.

Many stock-screening tools allow investors to filter for stocks experiencing unusually high volume. This can help narrow down the thousands of stocks in the market to those where something unusual may be happening.

Volume Isn’t a Buy Signal by Itself

There are other factors I consider before buying a stock. But growing green volume bars can be one of the most important clues because they reveal increasing demand for a company’s stock. For me, that makes volume a useful first step in identifying potential opportunities.

The Lesson I’m Taking Away

Ultimately, stock prices aren’t determined solely by how successful a company is. They are also influenced by how many investors want to own its shares.

That’s why I’ve started thinking of volume as the rocket fuel behind a stock’s price movement. It doesn’t guarantee that a stock will take off, but when I see price moving higher while volume is increasing, I pay attention.