The cumulative measure of trading activity is volume. Volume is typically represented as a histogram on charting platforms, like in the chart below.
As you can see, there are labels on the volume y-axis. These refer to the number of shares traded in a given period; each bar represents a day of trading activity (daily chart).
You should view volume in conjunction with price. Allow me to demonstrate the importance of volume with a recent cultural example.
Here in America, early in the coronavirus panic, many people frantically stocked up on toilet paper. This lead to a shortage, which lead to price-gouging on private markets like Craigslist.
Imagine if you plotted the volume of toilet paper sales in the days leading to the peak panic. The chart might look like this:
It’s behavioral finance in action. The demand for toilet paper begins to increase, based on fear steadily. As other market participants realize, they also buy due to their fear of missing out, creating more fear.
Ultimately, this ends in a buying climax, which always leaves behind bag-holders. We’ve all read the stories about the folks who bought truckloads of toilet paper in the hopes of reselling it, only to be left unable to unload it.
Stock charts work on any time frame, from monthly charts to a 10-second chart.
Your time frame of choice should depend on three factors:
- The amount of risk you wish to take on each trade
- The number of trades you wish to make per hour/day/week
- Your schedule
Your risk level per trade will change with each timeframe. As you can imagine, the average range of a monthly candlestick is much wider than that of a 1-minute chart.
It wouldn’t make any sense to set a 10% price target when day trading Apple, in the same way, it wouldn’t make any sense to set a 1% stop loss when trading Apple on a monthly chart. You need to look at the volatility per candlestick on your time frame and set your risk parameters from there.
The prominent method of quantifying volatility on a given time frame is through the Average True Range. The ATR is essentially a reading of the average volatility per-candlestick.
Here’s an example of the ATR on the SPY daily chart:
To demonstrate the difference, here’s the ATR on a SPY monthly chart: