Friday, April 17, 2009

A Most Important Lesson for Traders

Who is in your market will determine how--and how much--your market moves. This is one reason the Twitter posts note relative volume during the day: whether we're likely to get much movement or very little depends crucially on the level of participation of large traders in that market.

I decided to illustrate this with a different market: USO, the oil ETF. Notice (top chart) how the average daily high-low range has been cut about in half during 2009. That's half the movement--and for active traders, half the opportunity--over the course of just a few months.

Now take a look at what's happened to volume (bottom chart): that, too, has been cut by more than half.

If the institutions are not actively participating in your market, your market--on average--won't be active. Adapting to this reality by either trading other symbols/markets or by adjusting one's expectations for the slower market is an essential ingredient of trading success.