Average Volume and Volume Spikes: Complete Trading Guide

Educational beginner intermediate technical-analysis trading

What Is Average Volume?

Here's something that might surprise you: volume tells a story that price alone never could. Average volume, also known as Average Daily Trading Volume (ADTV), is the mean number of shares traded in a stock over a defined period, typically measured over 10, 20, 30, 50, or 90 trading days. This metric provides your baseline for normal trading activity, helping you instantly recognize when something unusual is happening in the market.

Think of average volume as the "heartbeat" of a stock. Just as a doctor notices when a patient's pulse quickens or slows, traders may notice when a stock's volume deviates from its norm. A stock that typically trades 5 million shares suddenly trading 15 million? This may indicate market activity—there may be noteworthy activity.

The Anatomy of Average Volume

Market observation shows is that average volume isn't just a number—it's a baseline that reveals various patterns. Here's a breakdown of what actually goes into this critical metric:

• Time Period Selection: The 20-day average is commonly used—long enough to smooth out daily noise, short enough to stay relevant. But here's where it gets interesting: institutional investors may observe the 50-day average for position building, while day traders may use on just 10 days for momentum plays.
• Rolling Calculation: Each new trading day pushes out the oldest day in your average. This means your baseline is constantly evolving, adapting to changing market conditions. A stock's average volume in January might be vastly different from its average in July.
• Market Hours Only: That 9:30 AM to 4:00 PM ET window captures the "official" volume, though pre-market and after-hours tell their own fascinating stories (more on that later).
• The Exclusions: Holidays and market closures don't count as zero-volume days—they're simply skipped in the calculation. This prevents artificial depression of averages.

How to Calculate Average Volume

Now, let's get into the mechanics. The formula is straightforward, but the insights it provides are anything but simple. Understanding how average volume is calculated helps you spot when the numbers might be misleading.

    Average Volume = Sum of Daily Volumes / Number of Trading Days
    
    Real Example - Microsoft (MSFT) 10-Day Average:
    
    Monday, Aug 12:    42,500,000 shares (Normal day)
    Tuesday, Aug 13:   38,200,000 shares (Quiet day)
    Wednesday, Aug 14: 51,300,000 shares (Earnings announced!)
    Thursday, Aug 15:  68,900,000 shares (Post-earnings reaction)
    Friday, Aug 16:    45,600,000 shares (Settling down)
    Monday, Aug 19:    39,100,000 shares (New week begins)
    Tuesday, Aug 20:   41,700,000 shares (Normal trading)
    Wednesday, Aug 21: 40,300,000 shares (Steady)
    Thursday, Aug 22:  43,800,000 shares (Options activity)
    Friday, Aug 23:    44,600,000 shares (Week close)
    
    Total: 456,000,000 shares
    10-Day Average: 45,600,000 shares
    
    Notice: The earnings spike pulls the average higher!
  

See how those earnings days skew the average higher? This is why context matters enormously. A stock trading at its "average" volume might actually be quiet if that average includes recent spike days. Traders often consider: "What's in this average?"