I received an email from a trader who lost a good amount of money today trading the stock indexes. He was particularly frustrated because the money was lost during a day when there was little overall movement and opportunity. Indeed, the daily range in SPY today was only about .39% on volume that was one of the lowest for 2010.
The trader's problem was that he identified the limited opportunity set only after he had lost his money. Instead of first identifying the day's likely level of opportunity and trading accordingly, he placed his capital at risk--only to discover the lack of opportunity.
One of the most valuable tools for identifying opportunity is relative volume. Seeing how today's volume compares to recent volume at that same time of day provides a perspective on how much institutional participation is in the marketplace. Markets need that participation in order to move: volume is the source of market energy. Without the energy of market volume, stocks may move higher or lower, but those moves are likely to be muted in magnitude.
Going back to 2009 in SPY, we find that daily volume correlates with daily trading range by a whopping .85. That means that over 70% of all variance in market movement (range) is accounted for by shifts in market volume.
By tracking how early volume compares to average volume early in the day, we can begin to get a proactive read on likely levels of market movement. The key to successful trading is not just scouring for market setups. The key is first asking whether markets are moving enough to justify trading those setups.
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6 comments:
What really helps me to survive slow trading days is 1.scratching a 100 lot on the opening 2. for the rest of the day playing shooter games. This way, I know I did something as oppose to nothing, plus got busy and not bored.
Your point is accurate enough, but to be fair, no one knows what the volume profile for the day will be ahead of time.
A slow morning may beget a wild afternoon full of opportunity. Fed days are like this. They can happen at any time.
At what point should someone decide the volume is too light to trade, 10am, 11 am , later? Volume has been lousy for weeks, so today was no surprise.
One of the more resilient patterns is that of expanding and contracting volatility.
On my predictor forum, I wrote Sunday night:
"Expect a narrow range between 1133 and 1142 for Monday"
This may be a case for having a plan and some knowledge of context could help. So, this is what I've referred to as framing and coming in with expectations -- which I know a lot of people nay-say but unless you have a real and solid intraday edge then I think framing is important.
The way to conceptualize that would be to have the hypothesis that the day would be a narrow range day and look for evidence such as expanding volume that would prove the hypothesis wrong. You are looking for the historical edge or case to be proven wrong!
Of course, opportunities are always easier to identify in the past. I'm sure this extreme momentum had a lot of people doubting the norms.
What is your stand , dealing with stocks and low volatility, range bound index action.
Do u believe it is as important to frame the day as it is with trading index futures?
The last couple of days have proven to be very rewarding to those who trades stocks, even though we have seen very low volatility (except Fridays action)
Do u believe that this is more of a function of the extreme low fear environment and the bullish position of the overall market?
Dr. Brett,
I've learned through trial and error that relative volume is one of the most important things to monitor for intra day trading. Here's a how I track it. http://www.thelawyertrader.net/2010/03/anemic-volume-today.html
Thanks for all the great work!
Adrian, I'd think this would have to do with the type of trading you are engaging in. Every stock will have its own normal volume, volatility, and stock specific catalyst.
Typically if stocks are moving higher when the index has stalled I'd interpret that to be a narrowing of the rally. It would represent that fund managers were being more selective in seeking out value.
In answer though, If you are engaging in short term trading, I'd think it would still be important to identify important news releases, overall market conditions, what would be best to trade, and anything that could influence your "market" in your time frame. As Dr. Brett has shown, identifying historical norms is one way to do that.
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