Volatility Trading: Are You Ready to Beat The Crowd with I Know First?

motek 1This stock market volatility trading article was written by Chloe Peng, Analyst at I Know First. Master of Science of Finance candidate at Brandeis University.


  • Trading volume and volatility trading can indicate market trends and potential price movements.
  • Regulations on private exchanges, or dark pool trading, tightens and exchange trading regains market share.
  • I Know First is launching the new forecasting service on trading volume to help you make better volatility trading decisions.

Trading volume measures how much a financial asset, for example Apple stock, has traded in a period of time. For stocks, volume is measured in the number of shares traded and, for futures and options, it is based on how many contracts have changed hands. For example, the bar on the bottom of the chart shows you the daily trading volume of Apple stock.

(Source: Yahoo Finance)

Trading volume serves as indicator of market movements, change of trends and potential price movements. For instance, rising markets on increasing volume are normally viewed as strong and healthy. Also, when prices fall with increasing volume, investors might want to be careful with the downside trend of the stock. In this article, I will present you the methodology and difficulty in calculating volume, the applications of it and most importantly, I Know First’s newly developed volume forecasting product.

Off-exchange Trading Hides Huge Volume From The Public

You may think it is straightforward to calculate volume, however, the actual operation can be much more complicated. In fact, non-exchange trading hides transactions with high volumes from the public. In the U.S., private trading has surged in recent years, accounting for an estimated 40% of all U.S. stock trades in spring 2017, compared with an estimated 16% in 2010. In April 2020, the off-exchange trades reached record highs in the US market. See chart below.

Dark pool is created to facilitate block trading by institutional investors so that the market won’t be adversely impacted by their large orders. It has been at the forefront of the trend towards off-exchange trading, accounting for 15% of U.S. volume as of 2014. It can be very beneficial for parties involved, as it reduces the impact of large transactions on asset’s price and volatility trading aspect. Moreover, transactions are much cheaper in dark pools and is negotiable between parties.

However, dark pools draw significant regulatory attention in recent years. Regulators become more cautious and suspicious due to the lack of transparency. This controversy leads to increasing efforts to control their appeal. In fact, the SEC issued several proposals to shine light onto dark pools. It requires off-exchange transactions to undergo Commission review to ensure that they qualify for the exemption from registering as an exchange. Additionally, investors will need to be provided with much more detailed information about the operations.

SEC has been supervising dark pools in a stricter way in recent years. The following table presents you the recent actions SEC charged on dark pools and other alternative trading systems. Many well-known banks and other financial institutions faced significant amount of settlements.

Source: SEC.gov

All the rules and regulations make institutional investors more careful on dark pool trades. The average trade size in dark pools has declined to only about 200 shares, making exchange trading gradually reclaim market share because there’s no need to involve dark pools for smaller transactions. This trend makes the actual trading volume closer to the volume observed by the general public. And as a result, the prediction of volume becomes more accurate and feasible.

How To Use Volume To Improve Your Trading Outcomes

As traders, we are more inclined to join strong moves and take no part in moves that show weakness. But how in practice can we utilize volume on decision making?

First, you need to bear in mind that trading volume must be used together with other indicators, for example fundamental valuations. Otherwise, it can be misleading in many situations such as when good news is released, there will be a huge increase in volume as investors will crowd in. However, by the time you purchase the stock, it may already be overvalued because the market has priced the bull news in. Therefore, you can’t solely rely on trading volume to make decisions, rather you can utilize I Know First’s fundamental analysis and algorithm-based stock picks together with information on volume.

As I presented in the above sections, trading volume can include much information about the stock. For example, volume can indicate trends. A rising market should see rising volume. Buyers require increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume might suggest a lack of interest, and this is a warning of a potential reversal and a sell sign. See the following chart of an example on Tesla (NASDAQ: TSLA).

(Source: Yahoo Finance)

In early July, TSLA stock price was growing together with trading volume, reflecting a rising market. But around July 14, the TSLA stock price was still growing yet the trading volume started to drop, showing a possible sign of reversal. The market has become cautious and lost interest in the stock. It would be wise to cash out profit before a drop in the near future. In fact, TSLA price did decrease a lot in the following days.

The concepts are so easy and direct that most people are able understand them. But huge profits are only available when only a few people notice the volume change. This requires investors to anticipate volume changed ahead of the market, which, to be honest, is hardly possible for retail investors. What often happens is that when you enter the market, the stock price start to drop from its highest. However, it doesn’t mean that you can’t benefit use volume information to improve trading. I Know First is launching a brand-new forecasting service that predicts trading volume for stocks.

New AI-powered Trading Volume Forecasting Service for Volatility Trading

I Know First is ready to provide you with the new forecasting service on trading volume. Subscribers will receive daily AI-based forecasts with different time horizons, ranging from 3-day to 1-year. This enables investors to anticipate future trends and beat the market. Our forecasts will help in better decision making and improve your portfolio. As exchange trading is gaining presence against off-exchange trading, the predictive algorithm will receive more precise information on stock trading.

We will provide the forecast by stock packages in the form of a heatmap. The signals show by how much the stock volume is predicted to change and predictability show how confident the algorithm is about the forecast. The color of the box means different direction of movements. Green means bullish and red means bearish.

For predictions on a single stock, I will show you an example on FCX trading volume. On July 1, the AI algorithm anticipated a 3-day volume increase. After 3 days, the trading volume increased by 5.14%. See charts below.

volume volatility trading
volume volatility trading

With the help of our volume forecast, you can better identify trends and decide on a good timing to enter the market and beat the crowd with volatility trading.

Here at I Know First, our AI-based algorithm has modeled and predicted assets price movement worldwide for short-term and long-term time horizons, ranging from 3 days to a year. Since 2011, we have been providing daily stock market forecast, gold prediction, Forex forecast, oil prices forecast, and, in particular, top tech stocks. Today, we are producing daily forecasts for over 10,500 assets. These forecasts generated by our quant trading tool are used by institutional clients, as well as private investors and traders to identify the best investment opportunities in the market.

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Please note-for trading decisions use the most recent forecast.