Wednesday, December 30, 2009

How Volume Determines Intraday Volatility and Opportunity

How much movement can you expect during a trading day? As I've stressed in past posts, this is very much related to the volume of business being transacted in the market (which, in turn, is a reflection of institutional participation).

Here is a nice graphic that illustrates the relationship: Note how volume in the S&P 500 Index (SPY) is quite correlated to the average daily high/low range. During holiday periods such as the present one, we can expect daily ranges of under 1%, whereas ranges of 2% are much more common once we do more than 250 million shares worth of business.