Average Daily Trading Volume (ADTV): Definition, How To Use It (2024)

What Is Average Daily Trading Volume (ADTV)?

Average daily trading volume (ADTV) is the average number of shares traded within a day in a given stock. Daily volume equates to how many shares are 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 higher average daily trading volume over low trading volume, because with high volume it is easier to get into and out of positions. Low-volume assets have fewer buyers and sellers, and therefore it may be harder to enter or exit at a desired price.

How Average Daily Trading Volume Is Used in Trading

Traders and investors alike pay close attention to ADTV because it provides valuable information about the liquidity and market interest in a particular security. The key uses of ADTV are as follows:

1. Liquidity Assessment: ADTV helps traders gauge the ease of buying or selling a security without causing significant price movements by actually taking an action. Higher ADTV generally indicates higher liquidity, making it easier to enter or exit positions without affecting the market price.
2. Volatility Analysis: ADTV can provide insights into the potential volatility of a security. If the ADTV is low, it suggests that the security may be less actively traded, and small buy or sell orders can have a larger impact on the price. On the other hand, high ADTV implies a larger number of trades, potentially leading to smoother price movements.
3. Trade Execution: Traders often use ADTV as a benchmark for determining appropriate trade sizes. It helps them avoid excessively large or small positions relative to the average market activity, ensuring that they can enter or exit positions efficiently without significantly changing the price.
4. Investment Suitability: ADTV is considered when assessing the suitability of a security for certain investment strategies. For example, day traders may prefer highly liquid securities with high ADTV to take advantage of frequent price fluctuations, while long-term investors may prioritize stability and liquidity for easier entry and exit.
5. Risk Management: ADTV plays a role in risk management by providing information about the potential ease of closing out positions. Higher ADTV indicates that it is generally easier to exit a position, reducing the risk of being unable to sell a security when desired.

What Tracking ADTV Looks Like

Illustration of ADTV Use

In this hypothetical situation, a stock trader has analyzed General Electric (GE) and decides, based on fundamental and technical analysis, that GE is a trading opportunity. It should also be noted that this trader is working for a $1 billion hedge fund.

The trader is constrained by a limit that permits trading only up to 10% of the value of shares traded in any stock. This limit is set to avoid affecting the price of the stock. The maximum allocation for GE for this hedge fund is $5 million, while the minimum allocation for GE is $250,000.

The image shows the candlestick chart of GE from early June 2022 to the middle of March 2023. The ADTV is represented by the blue line across the volume section.

On June 10, 2022, the ADTV for GE is 7.39 million shares, which is equals approximately $404.8 million in shares traded. Overall, GE is a suitable trading opportunity for the hedge fund, as the ADTV is well above the stock's maximum allocation. The trader assesses the liquidity and volume volatility of GE and decides to enter the position when the volume traded crosses above the ADTV. This is to ensure that the trades will be executed seamlessly and that the trade won't impact the stock price significantly.

This occurs at Point 1 on the chart, where 23.12 million shares were traded, at an approximate value of $1.29 billion. The closing price of GE at Point 1 is $55.80 a share. This volume crossed above the ADTV, which was 8.81 million, or about $4.92 million.

The trader takes a 0.10% of fund size position in GE, which is about $1 million. This is below the 10% trading constraint, exceeds the minimum allocation of $250,000 and is also below the $5 million maximum allocation.

Point 2 presents a second opportunity to acquire GE, where there was another ADTV crossover. The trader takes another $1 million position in GE to reduce the average acquisition price of the current GE position as well as to take advantage of the above-average liquidity in the stock. The closing price of GE at this time was $51.81.

Over the next six months, the price of GE rallies. GE stock reaches a price of about $84.71, which is 57.44% higher than the average closing prices at Points 1 and 2. The stock trader has more than 50% in unrealized gains from the initial positions.

At Point 3, the trader decides to exit the GE trade. The trade execution was based on the volume crossover on the ADTV as well as the fact that the trading amount of approximately $3.2 million was within the trading limits of the fund. This is because at Point 3, 28.59 million shares were traded, at an approximate value of $2.62 billion. Risk was also managed by using the trading limit along with the ADTV crossover, allowing the stock trader to easily exit the position.

This example was for illustrative purposes only and is not a recommendation to buy or sell GE stock. Also, the criteria for trading limits as well as ADTV are purely for illustration.

The Difference Between Average Daily Trading Volume (ADTV) and Open Interest

Volume is sometimes confused with open interest. Average daily trading volume is the average of how many shares (stock market) or contracts (futures and options market) change hands in a day. Open interest is a futures and options term that describes how many contracts are open, that haven't yet been closed.

Limitations to Using Average Daily Trading Volume (ADTV)

Average daily trading volume is a commonly used metric and is useful for determining if a stock meets an investor's or trader's trade parameters. ADTV is an average, though. On any given day an asset can deviate from the average, producing much higher or lower volume.

The average can also shift over time, rising, falling, or oscillating. Therefore, monitor volume and average volume regularly to make sure that the asset still falls within the volume parameters you desire for your trading.

Significant changes in volume may signal that something has changed within the asset, and these changes may be either unfavorable or favorable. Volume won't tell you which it is, but will let know that some further research or action may be required.

The Bottom Line

Average daily trading volume (ADTV) is a metric used in trading to assess the liquidity and activity level of a security, such as a stock, bond, or commodity. It represents the average number of shares or contracts traded over a specific period, typically measured on a daily basis. ADTV is calculated by dividing the total trading volume of the security over a specific period by the number of trading days in that period.

Traders and investors alike use ADTV in various ways. They use ADTV to assess liquidity, evaluate market activity, analyze volatility, optimize trade execution, and manage risk.

To use ADTV effectively, individuals and entities should consider its limitations. ADTV is historical and may not reflect current market conditions. It may not capture intraday volume variations or account for price movements. It's essential to combine ADTV with other indicators and information to make well-informed trading decisions.