Tuesday, June 30, 2009

Volume, Volatility, and Opportunity: Why Many Traders Struggle

I recently stressed the relationship between volume and volatility as a gauge of trading opportunity within the day. Here we see the principle illustrated at a longer time frame. As volume has steadily come out of the S&P 500 ETF (SPY), we have seen an extended range trade from early May to the present. Note also new lows in the VIX, which is now around 25, considerably down from levels earlier in the year. With reduced institutional participation in the stock market, daily trading ranges have collapsed; the 20-day median daily range in SPY is 1.59%, down from 3.58% at the end of March; 2.13% at the end of April; and 2.00% at the end of May. That is affecting both swing and intraday traders, as moves that once extended now reverse more readily. That is a major reason many active traders are having more P/L problems this year than last.