Friday, February 05, 2010

More on the Relationship Between Volume and Volatility


Traders typically try to anticipate market direction, but rarely do they attempt to forecast likely volatility. I'm increasingly convinced that the latter is as important as the former, as it tells you the price levels we're likely to hit in a given period of time.

As readers are aware, I use a market's relative volume as one way to gauge likely volatility for the day. On Thursday, for example, the day's volume in the ES contract not only stayed above its median volume throughout the day, but expanded its rise above the volume norms throughout the day. That told me that volatility was not likely to contract through the session.

Above we see how volume and volatility are related for the SPY ETF since August. The correlation is a very significant .78. How much business we do tells us something about *who* is active in the marketplace, and that tells us something about how much markets are likely to move.

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4 comments:

BundFox said...

Hey Brett, decided not to email this as I know you get snowed under with stuff. I have seen you occasionally linked to trance tunes and since its NFPR day you will be getting set with an early get go, I thought you might like this total floor filler to get you pumped for the day ahead. Good luck my learned friend
http://www.youtube.com/watch?v=PRdM0Qo5ZkY

Charles Upton said...

Great study Brett, thnx for sharing. Are you producing it in spreadsheet software?


Charles

kcp said...

Hi Mr Steenbarger, I usually find when something escapes me to this extent that I am missing an important point. So, at the risk of sounding facetious, my genuine question is - what do you gain by implying price volatility from volume if they happen in the same time frame, can you not simply look straight to the price volatility ?

vertical9r said...

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