Thick Market Features
The high number of buyers and sellers in a thick market means that it has certain resulting features.
A thick market tends to have high trading volumes as a result of the large number of orders in play. The more orders in a market, the more likely that buyers and sellers are able to find a satisfactory price and conduct trades, which means a higher trading volume than a less thick market.
Thick markets generally have low price volatility. More buyers and sellers generally means more people willing to trade at different prices, so price swings tend to be blunted by large order volumes at each new price level. Thick markets may feature large clusters of buyers and sellers around one or more price points, but in general they tend to feature a wide distribution of orders at different price levels.
A thick market will also tend to have thinner spreads, as most willing buyers and sellers will push the bid and ask prices toward each other. The more traders there are competing to execute trades, the more competitive will be both the bid and ask price, which means that the spread between them will be small in a thick market.
Thick Markets Vs Thin Markets
The opposite of a thick market is a thin market, with few buyers and sellers.
A thin market will obviously display the exact opposite features of a thick market, with low trading volumes, high price volatility and a large bid/ask spread.
Both thick and thin markets have their advantages and disadvantages. For example, a day trader may enjoy the opportunities for profit that the high price volatility in a thin market offers, but the large bid/ask spread can eat into profits and it can be difficult to close positions efficiently when trading volumes are low.
Thick Market and Trading
Day traders generally tend to shy away from thick markets due to their low price volatility, but the small bid/ask spread and high trade volumes can offer some advantages to various day trading strategies.
Day traders who prefer thick markets tend to use high turnover strategies that take advantage of small bid/ask spreads and large trading volumes to make many small profitable trades in a short period of time. This is in contrast to day trading strategies that look to make a small number of trades that exploit large price movements in a high volatility environment.
Day traders will often encounter thick markets in large capitalization and popular name securities, such as Apple and Alphabet.
While trading in thick markets can be inappropriate for many day trading strategies, it is ideal for a small amount of others. Furthermore, day traders may find that thick markets with some high volatility event, such as an earnings announcement, offer the best of both worlds for the vast majority of day trading strategies.