Sunday, December 06, 2015

Better Doing Through Better Viewing: Three Observations From Friday's Trade

Here are two charts of Friday's trade in SPY (blue lines).  The top chart tracks relative volume.  That is the volume traded at each minute of the trading day as a function of the average volume typically traded during that minute.  The proportion is expressed in standard deviation units, so that a zero reading means that average volume was traded; a 1.0 reading is one standard deviation above average; etc.

The second chart tracks the number of stocks trading on upticks versus downticks for every minute of the trading day.  That also is expressed as a function of the average upticking/downticking typical for that minute, with the result in standard deviation units.  Thus, a reading of 2.0 means that upticks dominated downticks by two full standard deviations.

The charts together tell us:  a) whether significant volume is entering the market and b) whether the volume in the market is significantly skewed to the buy side or the sell side.

Friday's trade illustrates three important ideas:

1)  Trends are more likely to persist when backed by significant volume and significant buying or selling skew to that volume;

2)  Fresh flows can enter markets at any time and change the odds of trend persistence.  Note the unusually strong buying flows during the noon (EST) hour on Friday.  That is atypical.

3)  Viewing volume and buying/selling pressure in standard deviation units provides a nice check on our cognitive biases, where we might be likely to overinterpret small, insignificant market movements.  What was important on Friday was that any selling that occurred was, for the most part, not statistically significant and not accompanied by significant outflows.

I generally find that better viewing makes for better doing.  These kinds of charts make a lot more sense to me than traditional price and volume barcharts because they directly express how I think about markets.  By creating better displays--ones more adapted to how we view markets--we can improve our information processing and our decisions.

Further Reading:  Freeing Our Charts From Time