Monday, June 29, 2009

Is There Opportunity in the Market?

So often, as I work with traders, I'll see them struggle to formulate an opinion: are we going higher, or are we going lower?

As the morning market today has shown us, the answer to that question is sometimes "None of the above."

Note the sharply declining volume, identified by the blue arrow. As volume has come out of the market, volatility has narrowed to the point where there has been little short-term opportunity.

Understanding that volume-volatility connection is key for active traders. When volume decreases, it means that the large, directional players in the market are relatively absent. What remains are market makers and scalpers who play for ticks within narrow ranges, making money between bids and offers.

When volume comes into a market, we don't just get more of the same trade; we get a qualitatively different trade, because that added volume typically reflects a certain kind of market participant. Knowing how much trade is occurring is a good clue as to who is trading--and that is an excellent tell for how much movement we can expect.