Tuesday, March 03, 2009

Tracking Volume Toward and Away From Value: Understanding Evolving Market Structure

One topic I'll be taking up in future posts is the location of shifts in relative volume vis a vis the market's most recent estimates of value. If, for example, we define a value region around the market's average trading price of the prior day, we can see how relative volume (volume for a given time period compared to the average volume at that period) behaves during moves to and away from value. This provides an indication of whether large traders (who account for large changes in relative volume) are accepting or rejecting the market's estimate of value. Such acceptance or rejection is of potential importance in identifying non-trending versus trending environments. See my prior post on this topic for more background.

An interesting study linked on the CME Group site breaks down volume participation in commodity markets to see how various groups behave relative to estimated market value. The PowerPoint PDFs are particularly informative. As readers know, I've also found Market Delta to be a helpful tool in gauging the activity of large traders. I'll be exploring the use of that and other tools in upcoming posts, with an eye toward identifying the structure of market days as they unfold.
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6 comments:

Damien said...

Thanks for the great posts! What is the name of the indicator that compares average volume to previous similar time periods?

Thanks again!

Adam said...

Brett ~

A particular thank you for pointing out the 5-part (plus Exec Sum), CMA study of large participants in commodity markets.

This contains very interesting data, particularly as relates to liquidity and open interest affected by the various types of trader behavior at varying day-lengths from contract expiration, and price discovery periods relative to "true value."

This work seems to be based on credible statistical methodologies that would achieve repeatable results for various market periods, unlike so much market "analysis" that does not convert data into actual information.

Adam.

Brett Steenbarger, Ph.D. said...

Hi Damien,

I call the indicator "relative volume", but I don't know of any formal, commercial name or source for the measure--

Brett

Brett Steenbarger, Ph.D. said...

Hi Adam,

Great point: not all data convey information!

Brett

Damien said...

Thanks, Brett!

So, you just eyeball yesterday's volume in the same time period? Do you use an EMA on your volume bars?

Brett Steenbarger, Ph.D. said...

Hi Damien,

I use median values, not EMA, and I use at least a 20 day lookback period for estimating volume at each time of day--

Brett