One way to reduce volatility in your portfolio is to focus on stocks that have an average daily dollar volume of at least $20 million.

In this post I’ll show you how to calculate the average daily dollar volume and how to sort lists in MarketSmith based on the 50-day average daily dollar volume.

There is nothing magical about $20 million. What’s important to take away is that stocks with a lower average daily dollar volumes may have more volatility and are typically thinly traded.

How you choose to determine what is a good baseline, depends on your investing style and risk tolerance.

How to Calculate Average Daily Dollar Volume

Calculating the average daily dollar volume is quite easy.

Average Daily Dollar Volume = average volume of shares traded per day * price

Here’s a screenshot of Sailpoint Technologies (SAIL) from with MarketSmith, make note of the values shown in the red boxes:

Average Daily Dollar Volume: 1,571,300 * $38 = $59.7 million

Trading over $59M in average daily dollar volume, SAIL fits well within the guideline mentioned above.

Let’s look at another example on the other end. Castle Biosciences (CSTL) trades an average of only 176,900 shares per day, here’s the corresponding average daily dollar volume:

Average Daily Dollar Volume: 176,900 * $49.30 = $8.7 million

Does this imply that CSTL isn’t a good trade, not necessarily. With a lower value, there may be more potential volatility in the stock’s trading range, Also, if you have a significant number of shares, know that it may be more of a challenge get out of your position if there is a steep drop in the price.

MarketSmith 50-Day Average Daily Dollar Volume

Although the average daily dollar volume is not shown directly in a MarketSmith, you can sort lists based on this criteria. In the bottom window there is a column labeled 50-Day Avg $ Vol.

As the name implies, MarketSmith calculates the average daily dollar volume for the past 50 trading days. Click on the header to sort the list.

Once sorted, you can view stocks beginning where the average daily dollar volume meets your preferred minimum.