"Thin Markets" - a market opportunity

In this post I am going to introduce you to what I call "thin markets" and how one can take advantage of these markets to turn profits in trading. I will start off with a hypothetical situation and tomorrow I will post some screenshots of me (hopefully) pulling it off.

First of all, lets imagine a distribution of sell orders prices for a random item:

Graph A: We can see the distribution of sell orders initially has a normal distribution at the high end of the price range (y-axis is an arbitrary price, x-axis is the sell price from high ---> low).

Of those sell orders, some will sit there unchanged (ie not actively managed) while others are constantly repriced (ie actively managed by market traders). Over time, the distribution of sell order prices will begin to shift toward lower prices (and volume will disappear from market as consumers make purchases).

Graph B: We can see the shifting of sell prices trending cheaper. What can happen next is when opporunities arise. Some traders/sellers might keep agressively pushing the price lower in order to sell stock as quickly as possible. As such, these actively managed sell orders can become cheaper so quickly that they 'seperate' from the original price point (and those high sell orders which remain unchanged). The distribution of sell orders can start to look like this:

Graph C: The peak in red above is what I call a 'thin market' where an island of sell orders has become isolated in price from the bulk of other sell orders on the market. Sometimes, a powerful market play can be made to purchase all the stock in that red peak, and relist at a higher price point as shown below:

Graph D: By shifting the peak back up, profits can be made. This has the added advantage that you have just removed all stock from those actively trading on the market, so it will be easier to control the market for longer and to sell more products at the new higher price.

Of course, this plan can backfire if a new producer comes along and dumps a new large inventory of stock onto the market and undercuts by a large margin. But that's the fun of the game :)

No risk - no isk.

Tomorrow or these weekend I will post the results of a market play just like the one above, so stay tuned.