KNOW YOUR VOLUME BEFORE ITS TOO LATE

So this week started full of good intentions. We planned on continue building up on the good run we were having so far. The market opened with the normal batch of news, gaps, rumors, noise and all…. But lacking one very important ingredient to my trading style. VOLUME

Sad thing is I only noticed we were having a VERY low volume day at around 11 am AND after all of my set-ups and trades have been stopped out at loses or giving back earlier gains.

When trading momentum, volume is a must have component for a successful trade. I need more people to come in and buy or sell the stock I am already involved in. This becomes even more important when I am going long since a stock must have buyers to go up.

Does this sound too obvious? Well, think about this for a minute. If you are shorting you don’t really need sellers for the stock to go down. All you need is for buyers to STOP buying the stock. If sellers and short seller come to the party, then for sure the short positions will be doing great. But just the absence of buyers can make a stock go down.

What if you have a way to evaluate the market in the first 15 minutes and know what are the chances that we it will have a low volume day?

For me, it will mean that I will limit the amount of trades I will have open at the same time. It will also limit the strategies that I will use during the low volume environment.  It will also give me a clear indication to call it a day after the initial burst in volume at the opening minutes.

When I studied my trading records I found out that 80% of my losing days were on low volume days. And not only that, those days my average loss was bigger that the losses on average to high volume days.

So here are the results of my basic statistical studies.

I went back and looked at the average volume at 10:00 am EST over the last 50 trading days and simply calculated percentile levels to see what the significant levels when compared to my records were.

• Days in the lower 15 percentile were extremely volatile as long as my profit and loss statement numbers. 50% of my losers came on those low volume days. So in plain English, avoid trading 15 percentile volume days with strategies based exclusively on momentum.

• Days in the lower 35 percentile call for smaller size and lower targets.

I started using these levels today and so far the results were great. The idea is that we start using the table in this blog and start monitoring how those levels (if at all) help us make better choices regarding what kind of strategies we should use during the trading day.

REMEMBER: the holidays are coming and we may see a drop in volume at some point in time. Get ready. Know your VOLUME and how it affects your strategies!!