Reblog: How To Trade Thin Markets

A thin market refers to a market characterized by a minimal number of buyers and sellers plus high price volatility. Also referred to as a narrow market, it is also characterized by high bid-ask spreads and low trading volume.

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This type of market does experience lots of drastic swings thus making it difficult for traders and investors to trade systematically. As a result, it is quite common in a thin market for price fluctuations to be larger between transactions and slippage can be a common occurrence.

How To Trade Thin Markets

As said earlier, a thin market is characterized by a small number of traders – buyers and sellers- which results in a low volume of transactions and illiquidity. Due to this, price movement becomes more volatile.

Furthermore, the bid and ask prices result in a wider spread. This is brought about by less competition by buyers and sellers which also increases the chances for slippage and orders not getting filled.

When you are looking to trade a security that has a wide spread you want to look at either placing a limit order at the mid price or close the ask and you want to avoid market orders at all cost.

Trading thin markets or stocks isn’t for everyone and is best to just avoid them all together. There are plenty of stocks to trade so risking a larger loss or a bad fill really isn’t worth. It’s already hard to enough to make money consistently trading so lets not make it any harder than it needs to be!

Look for stocks with lots of volume and preferably some kind of news catalyst which attract even more traders and liquidity.

Final Thoughts

As said earlier, a thin market is characterized by low liquidity, high price volatility and low trading volume. If supply or demand changes suddenly, it will result in buyers exceeding sellers or the other way around.

In this case, prices will experience higher volatility with whipsaw like price action. Try to focus your attention on stocks with plenty of liquidity so you won’t have any issues getting or out of a trade.

The original post is written by Ross C, appears on warriortrading.com and is available here.

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