Thin market definition
Thin is used to describe an illiquid, slippery, or choppy market environment. It may also be called a lean or narrow market. A thin market is characterized by light trading volume and erratic trading conditions. A thin market can apply to a single asset, a sector, or the entire market.
Strategies for thin markets
When markets are thin, supply and demand can inverse quickly, leading to sudden price spikes and dips. Because few bids and asks are quoted in thin markets, traders may have a hard time fulfilling their orders.
Traders can employ strategies when they find the markets they’re in running thin. One example is to trade smaller order sizes and uses wider stop and limit orders. Because thin markets are so choppy, traders may expand their stop orders further out to avoid being triggered by the more extreme volatility. This action inherently holds larger risks, so the trader may also place smaller order sizes to reduce losses if the stop order is still triggered.
When trading a thin market, it’s important to consider how much you can lose before judging how much you can make.