Intraday stock volume may be difficult to interpret since market activity is biased toward the start and conclusion of the trading day, with volume decreasing during the lunch hour and increasing in the late afternoon. What seems to be a huge volume event early in the session might peter out, trapping short-term traders who use technical data to generate buy and sell signals.
It is believed that the opening and final hours of the trading day account for 70-75% of total volume. The first hour has a high level of engagement because it incorporates overnight mood and news flow, as well as plays initiated by individuals and institutions based on prior end-of-day research. The last hour piques everyone’s attention since it ties up intraday themes while attracting speculative money hoping to profit from the day’s trading flow.
Several analytical approaches enable traders to predict intraday participation levels and closing volume with remarkable precision. These approaches provide useful data as early as the end of the first hour, giving plenty of time to develop strategies that leverage on the high emotional levels at play when a security is programmed to print two, three, or four times the typical daily volume.
Volume Run Rate vs. Average Daily Volume
One of the most successful strategies compares real-time intraday volume to a volume moving average. Average daily volume is often installed in charting packages and is adjusted to a 50- or 60-day simple moving average. When custom input is necessary, just take the specified period and divide by the total volume booked for that time.
Volume (Day 1 + Day 2 +… + Day 50)/50 = 50-Day Average Volume
Technicians may use a more accurate exponential moving average instead of a simple moving average, but this isn’t necessary since the result is used to provide a general estimate of involvement rather than an exact numerical level. It’s also more of an art than a science since typical volume fluctuates naturally over the course of a trading year, with larger participation levels in the first and fourth quarters.
Using the Quote Sheet Method
There are two methods for comparing average daily volume to intraday volume: visual and analytical. First, on a quotation sheet, position average volume next to real-time volume, allowing you to compare dozens of securities at the same time. Second, create a running total of average daily volume and superimpose it over the volume histograms at the chart’s bottom. This second technique is equally useful for end-of-day analysis and determining the effect of a rising or dropping average over time.
Wait until the end of the first hour before looking for stocks that have already traded more than one-third of the average daily volume when utilizing the quotation sheet approach. This cutoff number assumes that around one-third of that session’s volume will be booked in the first hour, another third in the last hour, and the remaining third in the closing bell.
Check the figures again at the conclusion of the second hour to ensure that the run rate corresponds to your original observations. This is significant because nightly themes may not be totally disregarded, resulting in high levels of engagement. This is particularly true when US equities markets trade in lockstep with European bourses, which shut at the same time as New York. When the run rate exceeds average daily volume by noon, anticipate it will continue to do so for the remainder of the session, supporting volume-based trading signals.
The Bottom Line
Estimate the emotional intensity of the audience by measuring the flow of intraday volume, seeking for higher-than-average involvement to provide successful trading chances.
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