Do High Volume Daily Trades Make More Money?

Do High Volume Daily Trades Make More Money?

Sept. 29, 2023

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This week we’re looking at whether volume matters when taking our trades–because we’ve been told it’s the most important thing.

Why do people say that, though? Why does volume matter?

It matters, allegedly, because high volume leads to higher quality trades. If a lot of traders are buying now, the momentum will most likely carry us in the right direction. Waiting for volume filters out the noisy bad trades, in theory.

But what if the entry is already a good one? Do we need a filter if it’s already filtered?

That’s where the long-term/monthly nature matters. An entry on a monthly chart is already filtered. It’s not subject to the manic, hour-by-hour whims of app traders.

So, it would seem logical that monthly charts don’t need a volume back-up.

And that’s exactly what we’ve seen this week.

But that changes as we get closer to the hyperactive noise.

When we moved down to the weekly charts in the previous Newsletter, we saw some improvement if we waited for volume to be high at entry. The biggest improvement we saw was on the QQQ.

This time, we’re going to move down to daily charts. Logic would dictate that volume would matter more on daily trades.

Here’s the Report on AMZN on a daily chart. We’re entering on 8 consecutive closes above the 150-day simple moving average (SMA) and exiting on the first close below the 150-day SMA. Long-only.

Those are good hypothetical numbers.

Now, let’s only enter when volume is greater than the average volume over the past 50 days:

Oops. It’s slightly worse. Even on a daily chart, volume didn’t help. (Note: this week I’m using profit to drawdown ratio as the deciding factor on what’s better.)

How about SPY? Here’s SPY with no volume filter:

Decent hypothetical numbers.

How about adding volume in?

Requiring volume is slightly better.

What about QQQ? Here’s the high-growth ETF with no volume:

And here it is with a volume filter:

Again, using volume is a tiny bit better.

So, what have we learned this week?

One, to make a definitive and final conclusion, we’d need more data. More stocks, more timeframes, etc.

Two, the fact that adding volume is not immediately and definitively better is very significant. For as much as the volume mantra is repeated, there is no evidence that trading using volume as the ultimate filter is better, even on daily charts. And in many cases on higher timeframes, adding volume is actually worse.

Three, when you move to long-term charts, trading gets simpler. Volume, market noise, and hours of intense chart-watching are not relevant, or necessary.

So it’s something to consider.

If you like simple things.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.