High-Frequency Trading: Percentage of Volume Strategy (POV Strategy)
Financial trading is a highly competitive arena where individual traders fight a losing battle against institutional traders. While institutional traders can sway the market with their huge investments, individual traders have no options but to follow where the market goes.
Identifying is very helpful in making huge profits; however, it is critical to consider other aspects such as volume. Combining trends and volume completely change your trading game.
First, we will start by understanding what market volume is, then we will do a deep dive into the Percentage of Volume Strategy.
Understanding market volume and the role that it plays
I read somewhere that
“Price is the head of the market while volume is the heart.”
Frankly, I could not have put it better myself! By definition, volume measures the commitment behind an asset’s price movement by telling you how many people are involved in that move.
If an asset is low in average daily volume, few people are participating in this movement. The reverse is also true, such that if an asset moves on a relatively high average daily volume, then many traders/investors are involved in that movement; therefore, suggesting that it is easy to find a buyer or seller for the said asset. It tells us about the emotional excitement or lack thereof in an asset.
Definition of POV Strategy
In trade, volume is the total amount of an asset traded within a given period, usually a day. In stock, volume is the total number of shares traded over a specified period. In crypto, it is the total number of crypto assets traded within this period, while in futures, it is the total number of contracts traded.
Every successful transaction between a buyer and a seller contributes to the total volume count of a given asset. Each exchange and trading platform updates its trade volume constantly throughout the day and then reports the total volume at the end of the day.
Volume can provide further evidence of the buying and selling trends in the market. It also helps to measure the relative significance of a market move. Therefore, volume distribution and its changes over time are essential tools for any technical trader. The higher the volume during a price move, the more significant the move, and similarly, the less significant the move.
The volume tells investors about the market’s activity and liquidity; liquidity is measured by how easy it is to trade an asset. Higher trade volumes mean higher liquidity. It also suggests better order execution and a more active market for connecting a buyer and seller. Generally, assets with more daily volume are more liquid than those without.
PRO TIP: volume tends to be higher near the market’s opening and closing times. It also tends to be higher on Mondays and Fridays. It tends to be lower around lunchtime and before a holiday.
What is POV (Percentage of Volume)?
Recently, High-Frequency traders and index funds have become a major contributor to trading volume statistics in U.S markets. Reports show that there are more passive investors than manual traders.
Among the most effective algorithmic and High-frequency trading strategies is the Percentage of Volume or POV.
Percentage of Volume or participation rate is a simple trading strategy that calculates the order quantity as a percentage of the total trade volume of an asset within a specified period.
The total traded volume is divided into small time slots. At the end of each time slot, the algorithm places an appropriate order based on the instantaneous volume of participation.
For example, a trader can specify that the algorithm buys 1000 assets at a percentage volume of 20 and does not exceed the $150 until the order is completed or the market is closed.
Percentage of Volume (POV) strategy in details
- Per cent of Volume is usually profitable when executing a large order quantity within a specific time window.
- Since its execution is completely reliant on the market, it is applicable when the trader is satisfied with the current market price. It is also great for when the trader feels confident with the expected market price.
- Percentage of Volume orders are determined by trading volume and not the limitations on the price band. The good news is that your buying and selling prices will still be close to the market-determined prices or the market data in general.
- The strategy utilizes a predictive algorithm that continuously updates volume forecasts to decide the next order quantity and price. The algorithm bases its decision on the traded volume within a specified period. The prices are usually very close to the market prices.
- By not executing large volumes or the entire quantity too quickly, Percent of Volume helps minimize the market impact.
- It is essential to specify a price band when using the Percent of Volume algorithm. Although the price is always very close to the market price, there are times when the prices are not favourable, resulting in huge losses.
Important POV strategy parameters
There are a few essential terms that you should note as you progress in your POV trading journey.
- Start time is when the buy and sell signals generated by the decision start to get sent to the market. It is essentially the time when the strategy starts to work.
- End time — this is the time when the strategy ends the submission of orders. At open orders are closed, despite their impact on the market.
- Percentage volume — also referred to as participation rate or volume distribution, is the percentage limit of the number of assets that can be traded instantly. In other words, it is the participation of strategy orders in total volume. It is calculated based on the total trading volume. For example, a 10% volume of 100,000 shares in a specified trading window means that 20,000 shares will be traded within that period.
- Price band — price band is a price limit for orders; beyond this price, the order will not be executed to completion.
- Delay — delay time between subsequent orders
- Reference price — a standard price that the algorithm uses as a reference point
- Target Percentage — this is the total quantity in percentage to be realized by the trading strategy.
- Side — this is the market side of orders; you won’t have to worry too much about it.
- Liquidity Taker Fees — liquidity taker fees, also known as payment for order flow or maker-taker fees, offer liquidity providers liquidity adding rebates for participating in markets. In this case, makers imply market makers who offer two-sided markets, and takers imply those trading the prices set by the market makers.
NFA Disclaimer
Please note that we do not provide financial, investment, or trading advice. Investing in cryptocurrencies or tokens is highly speculative, and the market is highly volatile and largely unregulated. Anyone considering crypto investment activities should be prepared to lose their entire investment. Invest at your own risk!
Thank You for Reading
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