Does Volume Really Matter In SPY?

Last Updated on June 11, 2021 by Oddmund Groette

I’m trading SPY, but until now I have not paid any attention to its volume until I saw this article. The result was interesting, but on second thoughts it makes sense. Why? 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.

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 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.