How do you get rid of absolute volume?

What is Absolute Volume in Finance?

Absolute volume refers to the total number of shares or contracts traded for a security or asset over a specified period of time, which is often daily (Investopedia). It provides a measure of the total trading activity in a market. Absolute volume differs from relative volume, which compares the current volume to a historical average.

Absolute volume is calculated by aggregating the trading volume each minute, hour, day etc. For a stock, this would be the total shares traded. For a futures contract, it would be the number of contracts traded. An increase in absolute volume points to higher liquidity and wider interest in a security (Investopedia).

Absolute volume is an important metric in technical analysis. Analysts use volume to identify shifts in supply and demand. Volume can signal changes in market direction, the start or end of a new trend, or warn of extreme market sentiment (Investopedia). High volume points to interest in a movement while low volume suggests a lack of commitment.

Why Reduce Absolute Volume?

There are some potential advantages and disadvantages to reducing absolute volume on Android devices:

Pros of high absolute volume:

Maximizes loudness of audio output

Ensures consistent volume level between devices
Prevents distortion or clipping at high volumes

Cons of high absolute volume:

Limits manual control of volume per device
Could lead to dangerously loud playback levels
Reduces flexibility in volume adjustments

Situations where reducing absolute volume may help:

Connecting Bluetooth speakers or headphones with different max volumes
Switching between headphones and phone speakers

Preventing excessively loud playback at night or in quiet areas
Allowing more granular volume control per audio device

So in summary, disabling absolute volume grants more independent volume control between paired devices, but could lead to distortion or inconsistent loudness.

Strategies to Reduce Absolute Volume

There are a few key strategies traders can use to reduce their absolute trading volume:

Limiting trading frequency/size – One of the most straightforward ways to reduce volume is to simply trade less. This could involve reducing the number of trades made per day/week or limiting the size/value of each trade. Trading less frequently and in smaller sizes will directly reduce total trading volume.

Using iceberg orders – With an iceberg order, only a portion of the total order size is visible to the market. The remainder of the order remains hidden. This allows a large order to be executed gradually without revealing the full size to the market. Icebergs reduce the visible volume impact of large trades.[1]

Trading during low volume periods – Volume tends to be lower at certain times of day, such as early morning or lunch hours. Similarly, volume may drop around major holidays or during low liquidity summer months. Planning trades to coincide with naturally lower volume periods will minimize the volume impact.

By being more selective on trade frequency, size, timing, and order types, traders have several tools at their disposal to proactively reduce their absolute trading volume and associated footprint in the market.

Impact on Liquidity

There is a close relationship between trading volume and liquidity in financial markets. Liquidity refers to the ability to execute orders and transactions without causing major price movements. When volume is high, there are more market participants and more buying and selling activity. This increases liquidity as it is easier to find counterparties to trade with and absorb larger orders without substantially impacting the market price.

Low absolute volume leads to lower liquidity. With fewer traders in the market, large orders can consume available volume quickly and push prices sharply higher or lower. Low liquidity markets lack depth, making it more difficult to execute trades, particularly for institutional investors and funds. Slippage and wider spreads can occur as buyers and sellers struggle to find counterparties. This increases costs and risks for all participants.

According to a study published in the Journal of Finance (Johnson, 2008), periods of low volume are associated with lower liquidity and greater liquidity risk. The study found liquidity is not perfectly predictable by volume alone, but the two have a strong positive correlation in most markets.

Impact on Volatility

There is a strong link between trading volume and volatility. According to this Investopedia article, higher daily volume often correlates with higher volatility, although this is not always the case. When a stock has low daily trading volume, the price tends to be more volatile. Since a company’s market value is based on the most recent trading price, stocks with low volume can see larger swings up and down.

As explained in this article, low trading volume means there are fewer buyers and sellers actively trading the stock. With decreased liquidity, there are larger gaps between bid and ask prices. Any trading activity can move the price more dramatically. This increased volatility makes the stock riskier for short-term trades.

Reducing absolute volume too much could significantly increase daily volatility. Investors should be cautious about making large trades in low volume stocks, as this can further exacerbate price swings.

Monitoring Changes in Volume

When reducing absolute volume, it’s important to closely monitor changes in volume to detect any issues or opportunities. Two useful indicators for tracking volume are:

On Balance Volume (OBV) – OBV is a technical indicator that uses volume flow to predict changes in stock price. If volume is higher on up days, OBV rises. If volume is higher on down days, OBV falls. Watching OBV trends can reveal changes in momentum and trading activity.
Chaikin Oscillator – The Chaikin oscillator measures momentum by comparing short-term and long-term volume moving averages. The level of the oscillator quantifies volume momentum. Spikes or drops can signal increased trading activity and potential price reversals.

In addition to indicators, traders can set up alerts and triggers based on volume metrics to detect significant changes. For example, you could set an alert when volume exceeds the daily average by 50%. This allows you to quickly identify and respond to any unusual trading activity as volume declines.

By monitoring volume indicators and setting volume-based alerts, traders can detect shifts in market activity and trader behavior. This enables informed decisions when reducing overall absolute volume.

Managing Bid-Ask Spreads

Reduced trading volume can often lead to wider bid-ask spreads, which is the difference between the price buyers are willing to pay (bid) and the price sellers are willing to accept (ask). This happens because with lower volume, market makers face higher risks in holding inventory and providing liquidity. To offset this risk, they widen spreads to generate more revenue per trade.

Here are some ways traders can minimize the impact of wider spreads in a low volume environment:

Use limit orders instead of market orders – Limit orders allow you to specify the price you’re willing to pay or accept, avoiding the spread altogether.

Trade more patiently – Making fewer but more strategic trades helps avoid excessive costs from spreads over many small transactions.
Consider trading larger size – This allows you to negotiate a tighter spread with market makers for your full order.
Focus on more liquid securities – Stocks and ETFs with higher average volume will generally have tighter spreads.

Use spreadorders – These orders specify both the bid and ask you’re willing to transact at.
Avoid market open and close – Volatility and wider spreads often increase during these periods.

Paying attention to bid-ask spreads and managing trade frequency, size, and timing can help minimize trading costs in lower volume environments.

Alternatives to Absolute Volume

Two common alternatives to tracking absolute volume are relative volume and volume-weighted averages. Relative volume compares the current volume for a stock to its average historical volume, giving a ratio that indicates if volume is higher or lower than usual. This helps determine if activity or interest has increased relative to normal levels.

Volume-weighted average price (VWAP) analyzes both volume and price over a specified time period. The average price is weighted to give more importance to periods with higher trading volume. VWAP acts as a benchmark for evaluating if the current price is overvalued or undervalued compared to the average.

Using indicators like relative volume or VWAP instead of absolute volume may provide more meaningful insights for trading decisions. The main drawback is losing the direct information that absolute values provide. Traders should consider testing both absolute and relative volume metrics to determine which fits their strategy best.

Volume Trading Strategies

Traders often use volume analysis to identify potential trading opportunities and determine when to enter or exit positions. Some key volume-based trading tactics include:

Volume breakouts – Watching for surges in volume as the price breaks out above a key resistance level or breaks down below support. Increased volume adds conviction to the price move and can signal the start of a new trend.

Volume spikes – Trading sharp intraday spikes in volume, which can indicate the start of a short-term trend. For example, a sudden surge of volume when the price moves to a new high or low for the day.

High volume reversals – High trading volume at a peak or trough can signal reversal points. As volume expands, it indicates the trend is reaching exhaustion and ready to reverse.

When implementing volume-based strategies, some key considerations include confirming signals with other indicators, watching for volume divergences, and being aware of news events or other fundamental drivers behind volume surges. It’s also important to gauge whether volume is consistently expanding or contracting during trends.

Overall, volume analysis provides a valuable added dimension for traders. By focusing on volume movements in conjunction with price action, traders can gain greater insight into developing trends and potential reversals.

Sources:

https://fastercapital.com/topics/importance-of-volume-analysis-in-trading.html

https://www.toolify.ai/ai-news/master-the-volume-based-trading-strategy-202581

Summary

In summary, reducing absolute trading volume can help dampen market volatility and stabilize prices, but it also comes with potential downsides like decreased liquidity and wider spreads. The key points are:

High trading volumes can exacerbate price swings and volatility.
Strategies like circuit breakers, collateral requirements, and transaction taxes can be used to reduce volumes.

Lower volumes may hurt liquidity and widen bid-ask spreads.
Changes in volume need to be monitored for any unintended impacts.
Alternatives like focusing on relative volume may be preferable in some cases.

Reducing absolute volume makes the most sense for frequently traded assets that are prone to overreaction and volatility spikes. It may not be as suitable for illiquid securities where lower volumes could severely impact liquidity. As with any market intervention, the risks and benefits must be weighed carefully.