A Simple Way to Read Intraday Volume

Intraday equity volume can be tough to read because market participation is skewed toward the beginning and end of the trading day, with volume shrinking through the lunch hour and picking up in the late afternoon. What looks like a high volume event at the start of the session can fizzle out, trapping short-term traders who use this technical data to trigger buy and sell signals.

A majority of all volume is booked in the first and last hours of the trading day. The first hour shows heavy participation because it captures overnight sentiment and news flow as well as plays set into motion by individuals and institutions using previous end-of-day analysis. The last hour attracts broad interest because it wraps up intraday themes while drawing in speculative capital looking to benefit from that day’s trade flow.

Several analytical techniques let traders measure intraday participation levels and estimate closing volume, often with surprising accuracy. These methods produce practical data as soon as the end of the first hour, leaving plenty of time to build strategies that capitalize on high emotional levels in play when a security is set to print two, three or four times average daily volume.

Volume Run Rate vs. Average Daily Volume

One of the most effective techniques compares the real-time intraday volume to a pre-selected moving average of volume. Average daily volume often comes preloaded in charting packages, attuned to either a 50- or 60-day simple moving average. It’s an easy calculation when custom input is required, taking the chosen period and dividing by the sum of volume booked during that period.

For example: Volume (Day 1 + Day 2 + … + Day 50)/50= 50-Day Average Volume

Technicians can apply a more precise exponential moving average instead of a simple moving average, but it isn’t required because the output is used to build a broad estimate of participation rather than an exact numerical level. It’s also more art than science because average volume shifts naturally over a trading year, with higher participation levels in the first and fourth quarters.

Using the Quote Sheet Method

There are two ways to compare average daily volume to intraday volume: one visual and the other analytical. First, place average volume next to real-time volume on a quote sheet, using the proximity to compare dozens of securities at the same time. Second, build a running total of average daily volume and superimpose it over volume histograms at the bottom of the chart. This second method can also be used for end-of-day analysis, as well as measuring the impact of a rising or falling average over time.

When using the quote sheet method, wait until the end of the first hour and then look for securities that have already traded more than one-third of the average daily volume. This cutoff figure utilizes the skew of how volume distributes throughout the day, assuming that roughly one-third of that session’s volume will be booked in the first hour, another third into the last hour and the final third into the closing bell.

Re-check the numbers at the end of the second hour to see if the run rate tracks your initial observations. This is important because overnight themes may not be fully discounted, extending high participation levels. This is especially true when U.S. equity markets trade in lockstep with European bourses that close at the New York lunch hour. When the run rate continues to exceed average daily volume into midday, assume it will do so for the rest of the session, supporting volume-based trading signals.

The Bottom Line

Measure the flow of intraday volume to estimate the emotional intensity of the crowd, looking for greater than average participation to yield profitable trading opportunities.