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This is a guest post on trading from Tusk Trader (check out the newly launched site: www.TuskFund.com), an experienced Bay Street trader who will be writing here until Tusk’s own blog is set up. Tusk had a front row seat to the twists, turns, and almost collapse of our capital market systems a few years ago and provides a unique perspective you won’t find anywhere else. For most people, financial literacy is the elephant in the room. Let Tusk Trader help change that. If you are on twitter, make sure to follow Tusk at @TuskTrader
Trading volumes have been down a lot over the last few years. Volume started to disappear in early 2009 and good volume days have been a rarity since then. This trend started off as being viewed as though volume was in a slump and would return soon.That has not happened. The markets have been melting up for the last 5 to 6 months and volume is still scarce.
A common phrase market watchers have been hearing since 2008, about all things financial, is that this is “the new normal”. Since the start of 2012, I can’t help but wonder if low trading volume is the new normal too and if traders need to just stop pining for its comeback. So many aspects of the markets have changed in the last few years. Why do we traders keep thinking that volume will come back to us? Maybe we just can’t seem to realize we have been dumped. It is Single Awareness Day next Tuesday and maybe traders should use that yearly chocolate holiday to close the book on our relationship with volume. It was good while it lasted. Volume made each day better. The sun shined a little brighter when you could get into a trade where you wanted and then be able to exit within a regular market swing.
Trading in a high volume environment has less risk. Traders can plan out a trade by looking at the trading book and volume charts. The entry and exit points can be chosen from the best possible options when there is good volume. When there is bad volume, entry and exit options are limited and an active trader’s volume per trade will also belimited.
The Financial Times has reported the January 2012 volume traded stats in the US and the numbers are startlingly low. The daily average volume for January was at levels not seen since 2005 and the three month average is at its lowest since 2007. A curious fact of this low volume is that the volatility last month was also down. The FT reports that, according to Deutsche Bank, price volatility in the S&P 500 index for the past month has fallen to 8.2 per cent, versus a three-month average of 21.8 per cent.
When volumes are down, volatility is usually up. This could just be a phase or it could be part of the new normal traders need to wake up to. Volume was the best partner a trader could ask for, but it appears to have moved on.