Wednesday, April 18, 2007

Volume and Opportunity in the Stock Market

A while back I posted a volume-based tool for identifying opportunity in the stock market. At the request of a couple of readers, I am updating that work.

I went back to the beginning of March (N = 33 trading days) and calculated the average volume for each 15-minute segment in the S&P emini futures market (ES). Here's how the data look (Eastern Time):

9:30 - 9:45 AM - 89,295
9:45 - 10:00 AM - 65,418
10:00 - 10:15 AM - 83,020
10:15 - 10:30 AM - 56,083
10:30 - 10:45 AM - 53,329
10:45 - 11:00 AM - 51,402
11:00 - 11:15 AM - 38,718
11:15 - 11:30 AM - 36,625
11:30 - 11:45 AM - 37,432
11:45 - 12:00 N - 36,176
12:00 - 12:15 PM - 35,816
12:15 - 12:30 PM - 32,387
12:30 - 12:45 PM - 28,597
12:45 - 1:00 PM - 22,768
1:00 - 1:15 PM - 26,359
1:15 - 1:30 PM - 25,091
1:30 - 1:45 PM - 33,799
1:45 - 2:00 PM - 27,099
2:00 - 2:15 PM - 37,832
2:15 - 2:30 PM - 40,125
2:30 - 2:45 PM - 38,464
2:45 - 3:00 PM - 32,324
3:00 - 3:15 PM - 35,541
3:15 - 3:30 PM - 34,831
3:30 - 3:45 PM - 37,462
3:45 - 4:00 PM - 59,943
4:00 - 4:15 PM - 62,491

You can clearly see the "smile" pattern of volume: highest at the beginning and at the end of the day. Recall that a relatively small proportion of trades account for a relatively large proportion of total volume due to the disproportionate influence of institutions and large locals in the electronic futures markets. What the above volume figures tell us is that these large participants are most active early and late in the day.

It is this participation of large traders that creates opportunity. When 15-minute volume has been above 150,000 contracts, the average high-low range in the ES futures has been .65%. When it has been between 100,000 and 150,000, the average range has been .41%. Between 75,000 and 100,000 contracts, we have a range of .31% and between 50 and 75 thousand, the range drops to .23%. At the lower end of volume, when we're between 25 and 50 thousand contracts, the average 15 minute range declines to .17%, and when we're less than 25 thousand, that average range contracts to .11%.

Indeed, the correlation between 15 minute volume and the price range of that same 15 minute period is a whopping .86. Volume brings volatility, which helps define the short-term trader's opportunity.

One of the great, unrecognized reasons so many daytraders fail is that they expect the same patterns and setups to produce the same results at different times of the day. Markets trade differently at different times of day, and they differ from day to day. The same profit targets and stops for a particular trade idea may lead to profit at one time of day and whipsaws at others. If you conduct your own performance review and notice significant P/L variation as a function of the time of day of your trades, this may well be a problem for you. You would need to either limit your trading to certain times of day (which is what I do) or adapt your setups to the anticipated volatility for the times that you are trading.

My hope is that you can print out the above breakdown of volume and use this as a guide to let you know when large traders are active and when markets are likely to be dead. Such volume information has kept me out of many bad trades and alerted me to promising breakout and trending moves.

11 comments:

AnaTrader said...

Brett

Your quote
You can clearly see the "smile" pattern of volume: highest at the beginning and at the end of the day. Unquote

From my trading on ES, I would say that my own observations tend to coincide with yours.

On some days, when volumes remain low throughout, it would be a tight rangebound day, and I would abstain from trading.

x said...

Hi Dr Brett,
Thanks for the update. The volume seems to be generally much higher than those previously published. Seasonality factor I guess?

Jordan

Brett Steenbarger, Ph.D. said...

Hi Jordan,

Good point; thanks. We had some heavy days in early March during that decline, so that affects the data. I sometimes eliminate extreme values and look at medians to get more conservative estimates.

Brett

x said...

Thanks Dr Brett.

Just to clarify: Is this set of data based on Median or average? I recall the last one was based on Median. Thanks

Jordan

Brett Steenbarger, Ph.D. said...

Hi Jordan,

I did use the average for these calculations, but median is probably most appropriate.

Brett

x said...

Hi Dr Brett,
I think this probably explains why this set of figures (based on average)are much higher than the previous set (based on median).

If & only if you have the time, would be interesting to see a comparison for Median volume now vs the last one you published. This would be more apple to apple comparison. Thanks very much.

Jordan

MikeH said...

Your daytrader failure quote should be in everyone's notebook.I know it is in mine.

I can find hundreds of blog entries describing afternoon trades that didn't behave properly or work out, and how they gave back morning profits. And I know they are reading this! Perhaps just as telling are my own journal entrys of holiday affected volume and, though noted, that I didn't change my tactics.

Brett Steenbarger, Ph.D. said...

Hi Jordan,

Thanks for pointing that out. I'll be happy to post median volume next time I update volume figures.

Brett

Brett Steenbarger, Ph.D. said...

Hi Mike H.,

Yes, I think it is *so* important to adjust trade ideas and setups for the volume and volatility occurring at the time. Otherwise, it's easy to either get stopped out prematurely or leave lots of money on the table. One way of adjusting is to trade from bars that represent a given number of ticks or volume, so that you draw more bars when markets are fast, fewer when they're slow.

Brett

conrad said...

Hello Dr. Brett,

thanks for your observations. I have noticed that in the last several days, the market indexes tend to dip in the very early and very late period of the session, wile they recover in the rest of the day . According to your analysis, this would mean that institutions are unwinding theyr positions with a slow selling. Do you see it in the same way or have a different explanation?

Thanks,
Conrad

Brett Steenbarger, Ph.D. said...

Hi Conrad,

My data suggest that institutions are buying weakness. Dollar flows have been consistently strong in the large caps.

Brett