Beginner’s Guide: Post 14
Okay, so you’ve learned how to place your orders. You know the difference between a market, limit, and stop. That’s a huge step! But have you ever wondered why some stocks are a breeze to trade, with your orders filling instantly at the price you want, while others feel like trying to navigate a swamp—choppy, unpredictable, and easy to get stuck in?
The answer, our team can tell you, almost always comes down to two of the most critical, yet often misunderstood, concepts in the market: liquidity and volume in trading.
Getting a grip on these two ideas is not just “nice to know”—it’s a core part of a day trader’s survival kit. Ignoring them is like trying to drive without looking at the road conditions. Sure, you might be fine for a bit, but eventually, you’re going to hit a massive pothole. This guide will break down what liquidity and volume are, why they’re your best friends (or worst enemies), and how to use them to make smarter, safer trading decisions.
What you’ll learn:
- A simple analogy to finally understand the difference between liquidity and volume.
- How to quickly measure a stock’s liquidity using the bid-ask spread.
- The difference between absolute volume and the “Relative Volume” pros use.
- Why trading low-volume, illiquid stocks is one of the fastest ways to blow up your account.
- A simple checklist to vet any stock for “tradability” in under 30 seconds.
Estimated time to complete: 15 minutes
Prerequisites: Placing Your Trades: Understanding Market, Limit, and Stop Orders
The Trader’s Analogy: The Marketplace Door and the Crowd
Before we get into the weeds, let’s use a simple analogy our new traders find helpful. Imagine the stock market for a specific company is a giant retail store.
- Liquidity is the size of the doors. A massive, multi-door entrance (like a Costco) lets huge crowds of people enter and exit easily and quickly without bumping into each other. That’s a highly liquid market. A tiny, single door on a small boutique is a bottleneck. If everyone tries to leave at once, it’s chaos. That’s an illiquid market.
- Volume is the number of people running through those doors right now. A huge crowd rushing in for a Black Friday sale is high volume. It tells you there’s a ton of interest and activity at this moment. An empty store on a Tuesday morning is low volume.
See the difference? You can have a store with huge doors (high liquidity) but no customers (low volume). But you can’t have a huge, active crowd (high volume) if the door is tiny (low liquidity). For day trading, we want big doors and a big, active crowd.
What is Liquidity in Stocks? (The Size of the Door)
Liquidity is the ability to buy or sell an asset quickly at a stable price. In simple terms, it’s how easy it is to get in and out of a stock without your own order causing the price to move significantly.
How to Measure It: The Bid-Ask Spread
The fastest way to gauge a stock’s liquidity is by looking at its bid-ask spread.
- The Bid: The highest price a buyer is currently willing to pay.
- The Ask: The lowest price a seller is currently willing to accept.
The spread is the tiny difference between these two numbers. In a highly liquid stock like Apple (AAPL), the spread is often just one penny. This means the marketplace is super efficient. In a less liquid stock, the spread could be 10, 20, or even 50 cents wide! That’s a huge hidden cost—you’re instantly down the moment you enter the trade.
A Peek Behind the Curtain: Level 2 Market Depth
For a real-time view of liquidity, traders look at the Level 2 order book on their trading platform. This shows a list of the buy orders (bids) and sell orders (asks) waiting at different price levels. In a liquid stock, you’ll see a deep “stack” of orders on both sides. In an illiquid stock, it’ll look sparse and empty.
Caption: The Level 2 order book for a liquid stock shows a deep list of buy and sell orders, indicating it’s easy to execute trades.
What is Trading Volume? (The Size of the Crowd)
Volume is the total number of shares of a stock that have been traded during a specific period. It’s a direct measure of interest and activity. Is this stock the center of attention, or is it a ghost town?
How to Read the Volume Indicator on Your Chart
Almost every charting platform displays volume as a series of vertical bars at the bottom of the price chart. Each bar corresponds to the price candle above it and shows how many shares were traded during that candle’s timeframe.
- Taller bars = Higher volume. More activity happened during that period.
- Shorter bars = Lower volume. Things were quiet.
Caption: The volume bars at the bottom of the chart directly correspond to the price candles, showing the amount of activity behind each move.
The Day Trader’s Secret Weapon: Relative Volume (RVOL)
Here’s a pro tip: absolute volume isn’t as useful as relative volume (RVOL). RVOL compares the current trading volume to the stock’s average volume for that same time of day.
An RVOL of 3.0 means the stock is trading at 3 times its normal volume. This is a massive signal that something unusual is happening—news, a catalyst, major institutional interest. It tells us the “crowd” is way bigger than usual, and that’s where day trading opportunities often appear. Learning how to read trading volume in context is a key skill.
The Dangers of Illiquid, Low-Volume Markets
Our team has a simple rule for new traders: avoid illiquid, low-volume stocks like the plague. Trading them is one of the fastest ways to lose money due to risks that simply don’t exist in liquid markets. This is the essence of low volume trading risk.
Danger #1: Getting Stuck in a Trade
This is the ultimate trader’s nightmare. You buy a stock, it starts to plummet, you try to sell… but there are no buyers. Your sell order just sits there, unfilled, as the price collapses. In a liquid market, there’s almost always someone on the other side. In an illiquid one, the other side can vanish.
Danger #2: Nasty Slippage and Wide Spreads
Remember slippage from our lesson on order types? In low-volume stocks, it’s a hundred times worse. With few participants, the price can jump wildly between trades. Your attempt to buy or sell can itself cause the price to move against you, and the wide bid-ask spread is a guaranteed loss you have to overcome just to get back to even. This makes using a stop-loss order tricky, as the fill price can be far from your stop price.
Danger #3: Erratic Price Action
Low-volume stocks don’t trend smoothly. They jump, gap, and chop around. Their charts are often ugly and difficult to analyze with any confidence because the price movements are driven by just a few orders, not a broad consensus.
A Tale of Two Stocks: A Real-World Liquidity Comparison
Let’s make this crystal clear. Here’s a look at two different assets on the same day, October 2, 2025.
The Liquid Market (SPY): The SPDR S&P 500 ETF (SPY) is one of the most liquid instruments in the world. On this day, it traded over 60 million shares.
- The Chart: Notice the smooth, connected price action. It’s easy to read and analyze.
- The Volume: The volume bars are consistent and high, showing constant participation.
- The Spread: The bid-ask spread was a penny wide all day.
The Illiquid Market (PETS): PetMed Express (PETS) is a smaller company. On this day, it traded just over 150,000 shares.
- The Chart: Look at the difference. The price action is choppy, with visible gaps between candles. It’s erratic and hard to trust.
- The Volume: The volume is sporadic. Many 5-minute periods have almost no trades.
- The Spread: The bid-ask spread was frequently $0.05 to $0.10 wide.
The Verdict: Which one looks safer and easier to trade? It’s not even a contest. As a beginner, you want to stick to the clean, liquid highways like SPY, not the treacherous, unpredictable dirt roads like PETS.
How Professionals Use Volume to Confirm Price Action
The importance of volume in trading goes beyond safety; it’s a powerful analytical tool. It gives you clues about the strength and conviction behind a price move.
Volume Confirms Breakouts
A stock breaking out of a chart pattern on weak, anemic volume is a major red flag. It’s likely a fakeout. But a breakout accompanied by a massive surge in volume? That’s confirmation. It signals that a large number of participants are aggressively pushing the price, giving the move a much higher chance of success.
Real-World Example: The AMD Breakout On September 15, 2025, AMD broke out of a key resistance level around $180. Notice the enormous volume spike on the day of the breakout. That surge told traders this was a legitimate, powerful move with institutional backing, not a fakeout.
Volume Spots Exhaustion
Volume can also signal when a trend is getting tired. If a stock is making new highs, but each new high is on progressively weaker volume, it’s a warning sign. It suggests that fewer and fewer participants are willing to chase the price higher, and the trend could be ready to reverse.
Your “Tradability” Checklist: A 30-Second Test
Before you even consider trading a stock, run it through this simple, 30-second checklist:
- Average Daily Volume: Does it trade, on average, more than 1 million shares per day? This ensures there’s generally enough interest.
- The Bid-Ask Spread: Pull up a live quote. Is the spread consistently tight (ideally under $0.05 for a mid-priced stock)?
- The Chart: Does the intraday chart (like a 5-minute) look relatively smooth, or is it full of gaps and weird price jumps?
If a stock fails any of these tests, our advice is simple: just move on. There are thousands of other stocks to trade that meet these basic criteria for safety and tradability. This entire process can be automated by creating a custom scan in a powerful tool like Trade Ideas to filter for only liquid, high-volume stocks.
Frequently Asked Questions about Liquidity and Volume
What is the difference between liquidity and volume in trading?
Quick Answer: Liquidity is the ease with which you can buy or sell without moving the price, while volume is the total amount of trading activity. Liquidity is the potential to trade; volume is the actual trading that occurred.
A stock can be highly liquid (tight bid-ask spread, deep order book) but have low volume if no one is currently interested in trading it. However, a stock cannot have sustained high volume without good liquidity. Think of it as a highway: liquidity is the number of lanes, and volume is the number of cars. A wide, 8-lane highway (high liquidity) makes it possible for lots of cars (high volume) to travel smoothly.
Key Takeaway: Liquidity enables volume; for day trading, you need to ensure both are present.
Why is liquidity important for day traders?
Quick Answer: Liquidity is crucial because it allows day traders to enter and exit trades instantly with minimal cost (tight spreads) and slippage, which is essential for strategies based on small price movements.
Day traders often rely on making many trades with small profit targets. Wide spreads and slippage in illiquid stocks can completely erase those small profits and turn winning strategies into losing ones. Liquidity ensures that the mechanics of trading don’t work against you.
Key Takeaway: High liquidity directly reduces your transaction costs and execution risk.
How does trading volume affect stock price?
Quick Answer: High volume acts as a catalyst, confirming the strength of a price move. A price trend accompanied by high volume is considered more significant and reliable than the same move on low volume.
Volume measures conviction. A breakout above resistance on high volume indicates strong buyer consensus. A sell-off on high volume shows panicked selling. Price moves on low volume are suspect and can often reverse quickly, as they don’t have broad market participation behind them.
Key Takeaway: Volume is the fuel behind the price; significant price moves require significant volume to be sustainable.
Is high volume good or bad for a stock?
Quick Answer: High volume itself isn’t inherently “good” or “bad”—it simply indicates high interest. It’s good if it confirms your trade direction (e.g., high volume on a breakout) and bad if it signals a strong move against you.
Context is everything. A massive spike in selling volume as a stock breaks support is bearish (“bad” if you are long). A huge spike in buying volume as a stock breaks resistance is bullish (“good” if you are long). High volume simply amplifies the significance of the price action.
Key Takeaway: High volume is a sign of importance; whether it’s good or bad depends on the direction of the price.
What are the risks of trading illiquid stocks?
Quick Answer: The main risks are wide bid-ask spreads, high slippage, the inability to exit a position quickly (getting “stuck”), and erratic, unpredictable price movements that are difficult to analyze.
These risks create a hostile environment for day traders. Wide spreads are a direct cost. Slippage means you get worse prices than expected. The inability to sell is a catastrophic risk for risk management. Overall, the odds are heavily stacked against you when trading illiquid instruments.
Key Takeaway: Trading illiquid stocks introduces significant execution risks that can make even the best strategy unprofitable.
What is a good average daily volume for a day trading stock?
Quick Answer: Most day traders look for stocks with an average daily volume of at least 1 million shares, though many prefer over 5 million to ensure excellent liquidity throughout the trading day.
This level of activity generally ensures a tight bid-ask spread and the ability to execute trades of a reasonable size without issue. Stocks with lower volume, especially below 500,000 shares, can become risky and difficult to trade, particularly during less active parts of the day.
Key Takeaway: Aim for stocks with an average daily volume in the millions to ensure a safe and liquid trading environment.
Does volume confirm a trend?
Quick Answer: Yes, volume is one of the most powerful tools for confirming a trend. A healthy trend should see volume increase as price moves in the direction of the trend and decrease during pullbacks.
For an uptrend, traders like to see rising volume on up-legs and falling volume on down-legs (pullbacks). This shows enthusiasm on the buying side and a lack of conviction on the selling side. A trend that continues on weakening volume is often a sign that the trend is losing momentum.
Key Takeaway: Healthy trends are accompanied by supportive volume patterns; divergences can signal a trend is weakening.
Next Step: Starting Your Analysis
You now understand the critical importance of choosing the right trading environment—focusing on stocks with high liquidity and volume. This is your foundation for safety. With that established, we can begin to build our analytical framework on top of it.
The most fundamental approach to analyzing charts is known as Technical Analysis. It starts with identifying the key battlegrounds between buyers and sellers on the chart.
Let’s dive in: Introduction to Technical Analysis: Finding Support & Resistance Levels
Disclaimer: All trading involves risk. The examples provided (SPY, PETS, AMD) are for educational purposes only to illustrate the concepts of liquidity and volume. They are not recommendations to buy or sell any security. Market data can be complex; for official definitions, consult an exchange like the NYSE or review educational materials from regulators like FINRA.
