Guiding Intraday Strategy with Relative Volume

Relative Volume (RVOL) is a simple mathematical formula that compares the current volume to a prior lookback period, such as the previous 5 days or previous 10 days. If the volume of the current period is higher than the average volume over the lookback period then we have readouts like 105 - 130. Conversely, when the current volume is lower than the lookback period then we have readouts like 90 , 80 or even in the low 60’s. How can we use this information effectively and what does it mean?

We want to think about a day’s trading volume in terms of “interest” or “participation”. When there is a lot of interest or participation this means that activity is very high from both buyers and sellers, which leads to disagreements on price. The increased activity will often result in a fast paced market with many rotations. As an intraday trader the days with many rotations are when we want to be the most active. On the other side of the spectrum, when RVOL is low there is a lack of participation. The lack of intraday activity results in a very slow or grindy action. This day type can be a bit more difficult to trade because there are less “disagreements” about price which often results in fewer rotations.

I want to emphasize I am speaking specifically about speed or pace and not day types. We have sessions with low RVOL that can trend and we have low RVOL sessions that can balance. This is also true for high RVOL. So RVOL doesn’t necessarily mean we are going to have a specific type of day, but it can help you understand what to expect in terms of SPEED or PACE.

There are also correlations between RVOL and the day's range. If you were guessing low RVOL = lower range and high RVOL = higher range then you are correct. I have pulled some stats to show this relationship.

Let’s define RVOL ranges:

60 - 85 - Low RVOL

86 - 99 - Neutral RVOL

100 - 120 + High RVOL

Now that we have a basic understanding of RVOL and the difference between high and low RVOL, let's develop a framework on how to use it effectively.

Low RVOL - In this environment we expect that the market is going to move extremely slowly, and have one way grinds that don’t offer many opportunities (pullbacks) to join the move. We also expect that opportunities are going to be limited. With that in mind there are a few adjustments that we can make.

Stay vigilant against over-trading.
Lean most heavily on structure and areas of interest.
Remain selective, A+ setups should always be our goal but it is even more important to focus mainly on the best opportunities in low volume.
Remember that this is a slow market so if you are in a trade don’t let the lack of speed cause you to exit early. Just because the market is moving slow doesn’t mean your trade or trade idea is wrong.
Size down, use tighter stops and have lower expectations. We all have certain goals for our trading, and in low RVOL days those should be reduced down significantly. Take a few trades and be done.
How about just don’t trade? Or take a few trades and be done. There’s incredible wisdom in not trading when the conditions aren’t great and I have just described very difficult market conditions. Nothing wrong with doing something else for the day.

Neutral RVOL - In this environment we expect a bit more normalized trading pace than the low RVOL conditions, so we are going to approach it more with a normal strategy. We expect to see more frequent rotations that we can trade, more opportunities to join moves and decent speed.

Remaining vigilant against over-trading while also being open to taking more setups. We should expect more opportunities but still need to be on-guard that the days range may be low.
Lean on structure as the primary basis for your trades, while also incorporating reads from OrderFlow, DOM, Time and Sales and other tools you might use.
Use normal sizing and stop management.
Stay active unless conditions change or you have drained your mental capital.

High RVOL - This is where we party :) , high RVOL days have the best opportunities for range expansion as well as the most rotations and total opportunities on a day. As an intraday trader we should seek to be most active during high RVOL days with a few adjustments.

We can allow ourselves to take a more relaxed approach and not worry so much about overtrading. Don’t go crazy but there’s going to be a ton of opportunity and you want to take advantage of it.
Stay focused on structure but you can lean in on aggressive activity from OrderFlow data or other tools that you use to visualize the market.
Start with a smaller initial size and build up to a full position in an acceptable range (this does not mean averaging down over 100 pts). Remember that higher volume means more participants and moves will be more violent so it’s ok to work a range, start small and build your position. However, you should be building your position in line with your normal risk limits.
Higher RVOL means more disagreements on price, do not stay married to your trades, move your stops or call BS on the markets moves. Fighting the tape is particularly unforgiving in high volume. If the market is breaking one way or another we want to trade in that direction generally speaking.

How to : What settings do you use?

In SierraChart I use the standard Relative Volume study and I use a 10 day lookback using volume from the full 24 hour session. I know that MotiveWave has a built-in RVOL study and I have heard there are some free 3rd party options for NinjaTrader.

This is on a hidden chart, I then grab the value of subgraph 2 called “cumulative volume ratio” using the “text display from chart” study and I put that readout on top left of my execution chart.

During my morning prep I will note the RVOL value and use that to make sure my expectations are aligned with RVOL and that I have adjusted my sizing / stops accordingly. If you want to read more about my full trading playbook then head over to the link below.

https://t.co/KPYC65dZW9

Trade well!

-LeoTheTiger

OrderFlow Labs

Guiding Intraday Strategy with Relative Volume

There are also correlations between RVOL and the day's range. If you were guessing low RVOL = lower range and high RVOL = higher range then you are correct. I have pulled some stats to show this relationship.

Let’s define RVOL ranges:

Now that we have a basic understanding of RVOL and the difference between high and low RVOL, let's develop a framework on how to use it effectively.

Stay vigilant against over-trading.

Lean most heavily on structure and areas of interest.

Remain selective, A+ setups should always be our goal but it is even more important to focus mainly on the best opportunities in low volume.

Remember that this is a slow market so if you are in a trade don’t let the lack of speed cause you to exit early. Just because the market is moving slow doesn’t mean your trade or trade idea is wrong.

Size down, use tighter stops and have lower expectations. We all have certain goals for our trading, and in low RVOL days those should be reduced down significantly. Take a few trades and be done.

How about just don’t trade? Or take a few trades and be done. There’s incredible wisdom in not trading when the conditions aren’t great and I have just described very difficult market conditions. Nothing wrong with doing something else for the day.

Neutral RVOL - In this environment we expect a bit more normalized trading pace than the low RVOL conditions, so we are going to approach it more with a normal strategy. We expect to see more frequent rotations that we can trade, more opportunities to join moves and decent speed.

Remaining vigilant against over-trading while also being open to taking more setups. We should expect more opportunities but still need to be on-guard that the days range may be low.

Lean on structure as the primary basis for your trades, while also incorporating reads from OrderFlow, DOM, Time and Sales and other tools you might use.

Use normal sizing and stop management.

Stay active unless conditions change or you have drained your mental capital.

High RVOL - This is where we party :) , high RVOL days have the best opportunities for range expansion as well as the most rotations and total opportunities on a day. As an intraday trader we should seek to be most active during high RVOL days with a few adjustments.

We can allow ourselves to take a more relaxed approach and not worry so much about overtrading. Don’t go crazy but there’s going to be a ton of opportunity and you want to take advantage of it.

Stay focused on structure but you can lean in on aggressive activity from OrderFlow data or other tools that you use to visualize the market.

Higher RVOL means more disagreements on price, do not stay married to your trades, move your stops or call BS on the markets moves. Fighting the tape is particularly unforgiving in high volume. If the market is breaking one way or another we want to trade in that direction generally speaking.

How to : What settings do you use?

In SierraChart I use the standard Relative Volume study and I use a 10 day lookback using volume from the full 24 hour session. I know that MotiveWave has a built-in RVOL study and I have heard there are some free 3rd party options for NinjaTrader.

This is on a hidden chart, I then grab the value of subgraph 2 called “cumulative volume ratio” using the “text display from chart” study and I put that readout on top left of my execution chart.

During my morning prep I will note the RVOL value and use that to make sure my expectations are aligned with RVOL and that I have adjusted my sizing / stops accordingly. If you want to read more about my full trading playbook then head over to the link below.