The only people who should get involved with low volume equities are those who know what they are doing. Ever get stuck on limit down days trading futures? Nothing makes you feel quite as powerless as being trapped in a position, burning money and just wishing for a miracle. i'd say trading low volume markets is asking to taste this type of helplessness
In order for a bar, say a time based bar which is what most traders look at afaik, to have meaning it has to have a certain amount of input, a certain amount of trades in it... if you have a thinly traded instrument you will have to back off your time frame in order to have enough input per bar to be meaningful. That can mean daily and weekly bars sometimes and if that is the case it entails holding overnight. Holding a really easy to manipulate issue overnight is not my idea of a good time but you can offset things by trading a bunch of different issues and hope that they are not all correlated in the case of some kind of financial disaster... so it sort of takes balls to trade these things but wait, there is an upside, there is an inverse correlation between a stock price and the average percent gain of the typical big move. Noise is noise and big moves are different from noise, thus, if you research such things you want to separate your tests from the noise and just focus on the bigger moves... if it's stocks you are looking at you are going to find that the problems of trading low priced [most low volume stocks are also low priced] issues are that you can't short them, sometimes you can't trade them at all, especially if they are OTC. The rules for OTC are mind bogglingly simple in some regards, heads the market maker wins and tails you lose is what they seem to boil down to.. imo they are untradeable or at least I never was able to get it done... huge potential gains on paper but your limit order CAN be traded through, left in the dust and it's within the rules.. my advice is to steer clear of OTC... low priced equivalent priced issues on the NASDAQ make bigger moves than on the AMEX or the NYSE so if you are looking for the sweet spot for low priced issues it's NASDAQ, over $5.. Under $5 means not allowed for shorting with some brokers, or maybe it's all of them, not sure on that... but as the price goes downward the moves to the long side become greater and if you can find an issue trading under a buck with enough volume to be tradeable that has not been delisted it can be dynamite... As you get into the lower prices the number of shares per equivalent dollar amount is greater so you want to use a broker that charges by the trade perhaps, not by the share... I did all my research years ago and I can't quite recall what, or if, I found anything regarding tradeable moves versus the overall market.. with higher priced and more attractive investment grade issues, their best trades come with the big overall market moves like we had earlier this year.. that is one of the problems with O'Neil's research, most of his trades all happened together, you read the book and think "wow, I can really make some steady money, but not really, the trades are clumped together timewise.... Finding swing trades when there is not a big overall move on can be sketchy, I can't recall if they were more abundant in the lower cost issues or not... I seem to recall that they were less dependent on overall market conditions, any researcher worth his salt can fire up Excel with some stock data and find out for himself, I lost track of the spreadsheets and all the research years ago, I'm just daytrading index futures now, stocks are SUCH A HUGE HASSLE, you need a screener, you need to watch the news feeds on everything in your portfolio, you need to just do so much to manage a basket of stocks that I learned to hate it big time, but I was also working full time at the time.. I might try it again some time but not too soon... Happy Trading...
I do not remember a thread about a systematic way to select securities for long term position trading on the basis of trading volume. Perhaps we might share some ideas here. I avoid trading securities if my position size is greater than 1 % of the average daily trading volume of the prior two months. I remember back testing various portfolios of large capitalization stocks and comparing simulation results with lesser capitalization stocks. I remember the small company portfolio required less risk - a smaller bet size - to produce a growth rate comparable to growth rate of the large company portfolio.
My guess is that market makers would make a killing from these markets. Spreads are huge. Can anyone confirm this?
low volume market => low volume position size... or in a long term view multiple buy in lower band confidence...
They would make more money on the bid-ask spread, but they cant make a killing because volume is low thus they don't make enough trades.
The thing is that by the time you screen for volume, price, and exchange on the lower volume issues there are surprisingly few tradeable candidates. The only upside is that their big moves are really big in comparison to higher grade issues. If you want to limit your exposure to risk they can't be your forte` because you won't find enough of them to trade your whole account with. I suppose if I was trading a portfolio I would allot a couple percent of it to each of those I could find whenever I could find them or if I had some money to play with that didn't matter and I had other income I would specialize in them but otherwise it's not practical.. DYODD of course, the research I did was in 1999-2000 and things might be completely different now but I sort of doubt it...
A lot of people seem to be focused on speculative strategies in this thread, but I believe Ernest Chan is referring to arbitrage opportunity when he talks about the advantages of trading low-volume markets. http://www.traders.com/Documentation/FEEDbk_Docs/2009/07/Interview.html I think its safe to say that speculation is best left to very liquid markets so that we can control our risk, but arbitrage strategies should work for the retail trader in markets where there is little competition.