How To Trade Low Volume Days

Holiday trading is also a feature of the holiday season, as most traders stay off their desks to enjoy a well deserved, well earned, relaxing year-end break after months of being caught up in a pressure cooker trading environment.

However, trading does occur and orders still go through for those of who had stayed on to see the year off.

Year-End: Typically Low Volume Period

Holiday trading refers to trading that happens around a holiday(s), when volumes are anemic. However, volatility could be high or low depending on the type of participation.

Trading around the Christmas break is one of the periods of light volumes. Data shows that under 3 billion shares exchanged hands on the NYSE for much of this week, below the 5 billion+ numbers seen at the start of the month. Trading on the NASDAQ has also tapered to roughly 1.5 billion shares.

With the tapering off of volume during the year-end a constant, it is time to take stock of how one should position himself/herself on these light trading days.

Pullback On Low Volumes Not Sign Of Trend Reversal

Volume usually determines the strength/weakness of a move. A decline in volume show a lack of interest among buyers or a signal the trend may not be reversing. So, traders should treat moves on either side of the flat line on low volumes as normal fluctuations.

Low Volume Pullback As Entry Point

Low volume pullback is usually seen as the result of nervous traders closing their long positions for booking small profits and is often not seen as a trend reversal. However, it could be used an entry point.

Entering a position on short-term weakness reflected in a low volume pullback increases the risk/reward ratio, as stop losses are closer to major support levels. Since volume is a leading indicator of major price moves, traders can stay alert to divergence between trend and volume using the on-balance volume indicator.

If price rises but on-balance volume falls, it is a signal the trend may be reversing. A falling on-balance volume suggests that down days are seeing more volume than up days.

All said and done, trading a low volume market can be a riskier proposition. In a low volume market, price moves are rapid, making it very difficult for you to time your move. Moreover, low volumes could be used by manipulators, as they have the leeway to exert an outsized influence on the stock price. Therefore, one may be well advised to proceed with caution when betting on a low volume market.