I made a guest appearance on SMB Capital’s Bionic Trader yesterday, and there were lots of great questions after my presentation on backtesting software.
One was: “Are there certain columns that the Strategy Cruncher identifies routinely as predictive across strategies?”
There are definitely a few, and one of them is Relative Volume.
With the increase in premarket trading over the last few years, there has been more interest in calculating Relative Volume in the premarket.
But I think most traders think about this calculation in the wrong way.
Even though there’s more premarket trading now, there are still plenty of stocks that don’t trade at all in the premarket session.
But in regular trading hours, it’s unusual for a stock not to trade.
This is what makes the Relative Volume calculation so effective during RTH trading.
So in the premarket, a Relative Volume calculation is less meaningful because the variance is so high (and often premarket volume of zero is normal).
The better approach for the premarket is a much simpler calculation:
pm_volume_ratio = pm_volume / average_daily_volume * 100Until significant premarket volume becomes truly “normal,” that’s the better calculation to use.
And then treat RTH and premarket volume separately when designing your system.
-Dave
