The idea that extreme trading activity (as measured by trading volume) contains information about the future evolution of stock prices is investigated. We find that stocks experiencing unusually high (low) trading volume over a period of one day to a week tend to appreciate (depreciate) over the course of the following month. This effect is consistent across firm sizes, portfolio formation strategies, and volume measures. Surprisingly, the effect is even stronger when the unusually high or low trading activity is not accompanied by extreme returns, and appears to be permanent.
The significantly positive returns of our volume-based strategies are not due to compensation for excessive risk taking, nor are they due to firm announcement effects. Previous studies have documented the positive contemporaneous correlation between a stock's trading volume and its return, and the auto correlation in returns. The high volume return premium that we document in this paper is not an artifact of these results. Finally, we also show that profitable trading strategies can be implemented to take advantage of the information contained in trading volume.
http://finance.wharton.upenn.edu/~rlwctr/papers/9901.pdf
Like earnings announcement anomaly, the volume effect is another anomaly which can be profitably traded. Researchers have found this effect persists across various markets. Making it work as always requires crafting a proper trading system. Like these there are so many proven edges, but most traders are not aware of them. In a way that is good because the edge continues to work as very few people use it.
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