Just about everyone looks at volume, but do they actually *see* volume?
Volume tells us who is in the market. Who is in the market determines how the market will move.
Since 2019, yesterday's volume in SPY correlates with today's volume by over .80.
Since 2019, today's volume correlates with today's high-low range in SPY by a little under .60.
When volume expands, it's a sign that institutional participants are active in the market. Because many of them trade directionally, their involvement/non-involvement contributes to volatility and the ways in which moves continue or reverse.
Since 2019, daily SPY volume correlates with VIX by over .80.
When we look at relative volume (how today's volume at a given intraday period compares to average volume for that time of day) and track its evolution through the day, we can clearly see--in real time--who is playing at the poker table and who isn't. That helps us handicap the odds of moves continuing or not.
When we note the price levels at which relative volume expands or contracts, we gain a window into the intentions of other traders. This is where Market Profile can be quite useful.
If you're an active trader, track your P/L as a function of time of day. Odds are good that your profitability is related to the volume patterns for that time of day.
When we have stable volume trading day over day, the odds are increased that the cyclical behavior of recent markets will continue in the near future. There can be a tremendous trading edge in this information.
The market magician has us looking at the hand that waves price in front of us. But the magic is being done with the other hand, the volume hand that few people truly see.
Further Reading:
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