Intraday stock trading volume may be difficult to interpret because market participation tends to start and end the trading day, with trading volume decreasing during lunch hours and picking up in the late afternoon. What looks like a high volume event at the beginning of the trading session may fail, putting short-term traders who use this technical data to trigger buy and sell signals into trouble.
It is estimated that 70-75% of all transactions are booked in the first and last hours of the trading day. The first hour shows a lot of participation, as it captures overnight sentiment and news flow as well as personal and institutional use of the game launched by previous end-of-day analysis. The last hour attracted widespread interest because it ended the intraday theme while attracting speculative capital hoping to benefit from the trading flow of the day.
Several analytical techniques allow traders to measure intraday participation levels and estimate closing volume, often with surprising accuracy. These methods generate practical data immediately at the end of the first hour, allowing plenty of time to develop strategies to take advantage of high emotional levels when securities are set to double, triple, or quadruple the average daily print volume.
Volume running rate and average daily volume
One of the most effective techniques is to compare real-time intraday trading volume with a pre-selected volume moving average. The average daily volume is usually pre-installed in the chart package and is coordinated with the 50-day or 60-day simple moving average. When a custom input is required, this is a simple calculation. Take the selected time period and divide it by the sum of the number of reservations in that time period.
For example: Transaction volume (1st day + 2nd day +… + 50th day)/50 = 50-day average transaction volume
Technicians can apply a more precise exponential moving average instead of a simple moving average, but this is not necessary because the output is used to construct a broad estimate of participation rather than a precise numerical level. This is also more like an art than a science, because the average transaction volume changes naturally within a trading year, with higher levels of participation in the first and fourth quarters.
Use quotation method
There are two ways to compare the average daily volume with the intraday volume: one is intuitive and the other is analytical. First, place the average volume next to the real-time volume on the quotation, and use proximity to compare dozens of securities at the same time. Second, construct a running total of the average daily trading volume and superimpose it on the trading volume histogram at the bottom of the chart. The second method can also be used for end-of-day analysis, as well as measuring the effect of rising or falling average values over time.
When using the quotation method, please wait until the end of the first hour, and then look for securities whose trading volume has exceeded one-third of the average daily trading volume. This cut-off figure takes advantage of a deviation of 70-75%. It is assumed that about one-third of the transaction volume during the period will be booked in the first hour, another third will be booked to the last hour, and the last third Will be booked until the closing bell.
Recheck the numbers at the end of the second hour to see if the run rate is tracking your initial observations. This is important because overnight themes may not be completely discounted, thereby expanding high levels of engagement. This is especially true when the U.S. stock market is trading in sync with the European stock markets that close at lunchtime in New York. When the operating rate continues to exceed the average daily trading volume to noon, it is assumed that it will do so during the remaining time of the entire trading session, thereby supporting trading signals based on trading volume.
Measure the flow of intraday trading volume to estimate the emotional intensity of the crowd, and look for above-average participation to generate profitable trading opportunities.