The dramatic change in economic conditions has led to even intraday traders taking a glance at a company’s fundamentals before taking a position in its stock. However, the reverse is usually not true and long term investors typically pay little attention to the intraday trading patterns of a company’s stock. This is often a mistake as intraday trading patterns can provide a lot of value to a long-term investor’s decision-making process. 

Before examining the primary benefits of using intraday data for long-term investors, a reader should be familiar with both tick data and intraday data. 

Information on the Types of Investors

Long-term investors will often place more value on trading activity by institutions as opposed to smaller retail investors. Funds that buy and hold stocks are powerful movers of a stock’s price over the long term, and long-term investors are often scouring briefing notes and interviews for clues as to the activities of funds. Unfortunately, end-of-data data only provides aggregate volume information which does not differentiate between retail and institutional investors. 

Tick-data, however, does provide indications as to the type of investor - large volume trades are almost certainly by institutions. Furthermore, institutions with short-term horizons (such as high-frequency hedge funds) will typically exhibit a different trading pattern with large buy and sell orders close to each other. Thus a tick chart that shows large volume single-trades over a long and sustained period during a day will be indicative of buying by a long-term investor.

Accurately Estimating Trading Profits

Long-term investors frequently assume that they will be able to purchase or sell a stock in the middle of the intraday range, however, this is often a flawed assumption and can have a large impact on returns (especially on less liquid or lower-priced stocks). 

In reality, the investor will be faced with the choice of taking either the bid or offer (or else placing an order away from the bid/offer which might not be filled). For a less liquid stock, the bid-offer spread can be very large at different periods of the day or can have significant imbalances - for example after an unfavorable news or earnings release the bid volume can be very small and be a significant barrier to selling. 

Thus before making decisions on purchasing small or mid-cap stocks, it is worth reviewing the bid-offer prices to incorporate this into expected profits. 

Accurately Estimating Volume For Small-Cap Stocks

The daily aggregated volume for small caps is often very misleading of the true trading activity in the stock. Long-term investors sometimes assume that the daily volume of a stock will be sufficient for them to trade in and out of a stock safely. However, the intraday volume often tells a different story as many small-caps have highly irregular trading patterns with very small volume bid and offers for most of the large and then sudden large spikes in volume. Such trading activity would make it extremely difficult to trade in and out of a stock without significant costs.

Detecting Demand Imbalances

Analyzing tick data can give indications to demand imbalances that can drive prices for long periods. Long-term investors are often interested to know if the movements in a stock price are driven by buy or sell orders which would be a strong indicator of market sentiment, this cannot be estimated from daily price data which aggregates all buy/sell orders.
One method of doing this is to use tick data to filter for upticks (which are typically buy orders being executed)  versus downticks (typically sell orders), the ratio of buy orders executed to sell orders is a powerful indicator of sentiment.