Dr. Brett Steenbarger looks at SPX volume and daily range to set expectations for daily trades on TraderFeed. Volatility generally picks up after the Fourth of July, though volume usually stays low over the summer, so I don’t think that one should use volume as a proxy for volatility as Dr. Brett mentions here. You can use volatility directly.
Above we see the five-day average volume (top chart) for the S&P 500 Index (SPY) and the five-day average trading range (bottom chart). One theme stressed on this blog is the importance of trading volume, largely because of its correlation with volatility.
As stocks have moved higher since the March lows, volume has steadily declined and so has the average high-low trading range. Stocks now provide almost 1/3 the expected range as earlier in the year.
This is why I find it crucial to adjust profit targets for volatility. (Note: SPY profit targets are posted every morning before the market open via Twitter; follow here or check the last five tweets on the blog page). Without such adjustment, we inevitably expect too much out of a trade when volatility comes out of the market, leaving us open to frequent and frustrating reversals.
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