Sensing Market Condition

A market may be nervous when it goes into consolidation. It may be nervous when you see lots of dojis and flip-flopping – opening high one day and closing low, and then opening low and closing high the next day. A market may be nervous when it is backing and filling – opening on gaps and then filling in those gaps, or trading way up or way down, only to finish back where it started, or at an extreme opposite to the way it traded most of the day.

A market is illiquid when the tick volume is low for any given period, and this continues over a space of many periods. To know what normal tick volume is, you must study what it was during periods when you are able to trade normally with decent fills. It is illiquid when both open interest and daily volume are low. It is illiquid when the tick size is erratic, and you see many large ticks mixed in with smaller ticks.

A market is too volatile when it becomes a fast market. It is too volatile when slippage on fills is excessive regardless of whether this occurs when the tick size is excessive, the market is illiquid, or the market is frequently under fast market conditions. A market is too volatile when it shoots way up to an extreme high relative to where prices have been on a report or news item, and then right back down again to a relatively extreme low. The opposite is also true when the market shoots down first and suddenly reverses and moves up, with both moves to relative extremes.

All of the above have been true from time to time in all markets, almost all the time in some markets. It is best to trade with caution at those times or perhaps to not trade at all.

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