Does Volume Really Matter In SPY? (A Volume Based Trading Strategy In The S&P 500)

Last Updated on June 19, 2022 by Quantified Trading

Does volume matter in SPY? I’m trading SPY, but until now I have not paid any attention to the volume. Let’s test a simple SPY volume trading strategy.

Volume probably matters in SPY because a lot of SPY trading is hedging. I trade SPY every day in my day trading simply for hedging purposes. So when the markets turn ugly, I’m not surprised to see volume pick up (for hedging purposes). Unfortunately, we don’t know today’s volume until the trading day is finished.

Below we form a trading hypothesis or trading idea we can label SPY volume trading strategy: volume:

SPY volume trading strategy

What happens the next day after a day with below-average volume?

(All testing is from 2005 until present in this article)

The pink line is “buy and hold” and blue is the strategy. As we can see, nothing to gain using yesterday’s info on volume.

I tested a lot of different strategies/ideas but only one pattern seems to have any predictive power:

If yesterday was a volume day below average, it pays to go with the direction of the opening the day after if it’s a “big” gap up (more than 0.6%, but the higher the opening the better the average):

The above graph shows the accumulated profits from open to close if yesterday was a below-average volume day and today’s open is above 0.6%.

This is an average of 0.22% per fill, quite good.

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