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Light Volume Markets Can Be Tricky

By Nicholas SantiagoStock MarketsAug 29, 2012 01:07AM ET
Light Volume Markets Can Be Tricky
By Nicholas Santiago   |  Aug 29, 2012 01:07AM ET
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As you know, the trading volume in the month of August 2012 has been extremely light. In fact, this year we have seen some of the lightest volume in the past 10 years. This trading period is also known as the summer doldrums. During this time, many inexperienced traders and investors try to force trades in light volume markets. That strategy is often the kiss of death.

Light volume markets do not favor the individual investor or trader. The reason is because it is simply too easy for the institutional traders to bully the market in their favor. You see, the institutional trader has unlimited funds or deep pockets and if they are wrong they will simply work the position by averaging in and forcing the position into profitability. As an individual trader that cannot be done and the institutional traders know that.

Many times I hear traders talking about trading and investing like Warren Buffett. While this theory sells books and sounds good on paper it is simply not practical. How many traders could have bought Goldman Sachs Group Inc (NYSE:GS) at $125.00 a share in 2008 and allowed it to decline to $48.00 a share? The answer is only Warren Buffett or another large institutional trader. The average person should never allow a stock to go against them by more than 10.0 percent. This is why it is so important to be a technical trader even if you want to follow the story or the news that is being told to the public.

Day traders must know the weather outside. Often I will see amateur day traders force trades in light volume markets just for the sake of being in a position. Sure, the first hour or ninety minutes of the trading day will give day traders a few opportunities, however after that time the opportunities become very rare.

Light volume markets also slightly favor the upside trend. This is something else that many day traders should remember. I cannot begin to tell you how often day traders will try and sell stocks during the lunch hour when volume is usually at its lightest. If the light volume slightly favors the upside, it really favors the upside when it is the lightest part of the trading session. Anyone that is new to trading or day trading must learn these and other rules before committing a lot of capital to this business.

Most traders and day traders should trade in active markets and high volume stocks. What I mean by this is that it is easier to trade stocks that generally trade more than 1 million shares a day on average. It is very difficult to trade a light volume market let alone a light volume stock in a light volume market.

For example, when creating a stock universe new traders should pick stocks such as Exxon Mobil Corp (NYSE:XOM), Halliburton Co (NYSE:HAL), Broadcom Corp (NASDAQ:BRCM), and Freeport McMoRan Copper & Gold Inc (NYSE:FCX). While these names may not be sexy and ultra volatile they have plenty of volume and can be easily read on the charts. Remember, the light volume markets are very tricky.


Light Volume Markets Can Be Tricky
Light Volume Markets Can Be Tricky

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