picking your markets to trade
DESCRIPTION
If you swing trade, simultaneously day trade multiple markets or even if you’re considering a switch in product for your day trading, you’ll need to take into account a number of considerations in order to identify and select good markets to trade. I’ll run through a checklist of basics so you can get the gist and search for yourself.TRANSCRIPT
If you swing trade, simultaneously day trade multiple markets or even if
you’re considering a switch in product for your day trading, you’ll need to
take into account a number of considerations in order to identify and
select good markets to trade.
I’ll run through a checklist of basics so you can get the gist and search for
yourself.
Type of instrument – You obviously need to ask the question of which type of instrument it is that you’re looking to trade. It could be a stock, option,
forex, future, cfd etc.
Of course you don’t want to pigeon-hole yourself into a certain type, but there are nuances between each one and besides, you may be constrained
by the broker you currently use.
Type of class – This is what the product is or is based on. It could be
an equity, fixed income, index derivative, forex or a commodity for
example.
And whilst a market is a market, there are different price drivers for each, different participants with different
objectives and different hallmark behaviors.
You might find it more of a struggle to trade your trend-based strategy in a mean-reverting market for example.
Cost of trading – What exactly is it going to cost you to trade a product? I’m not just talking about the cost of any commission or spread involved.
You have to consider how much cash you need to put up in margin in order
to trade.
You also need to consider what the value of the minimum price increment is (i.e. tick
or pip), the normal daily range of the product and consider these factors in
conjunction with the size of your trading account.
It’s no use deciding to trade the Dax on your $5,000 account just because you can get $2,500 intraday margin for it.
Liquidity – There are loads of products that’ll meet your specific requirements
to trade them in theory.
But when you take liquidity into consideration, your view on what you
can and can’t trade will probably change.
An important consideration therefore is going to be daily volume. Is there
enough volume trading on a daily basis to be able to get in and out of the market without too much trouble?
But total volume only tells part of the story.
The other factor is order book liquidity. This means how easy it is to get in and
out at every price even when the market is moving quickly.
You can go from one end of the scale with something like the E-mini S&P 500 that normally has many orders
during regular trading hours,
to the other with RBOB Gasoline where prices move very quickly and
the order book is generally thin. Which you choose depends on your strategy and objectives (and depth of pockets).
Market Condition – There are certainly some strategies that are more robust than others and they
might work relatively well in several types of market condition.
However, there are also some great strategies that struggle when a market
shifts gear.
So in particular, if you’re looking at trading a number of markets at the
same time it’s important to assess the current conditions of any markets you’re looking to trade as well to
keeping an eye on those you already trade.
A good starting point is to do a quick multi-timeframe analysis.
http://www.netpicks.com/trading-article/multi-timeframe-analysis/
Market Correlation – If you’re trading multiple markets, it’s sensible to
diversify.
Although it’s important to recognize that there are times when everything becomes correlated, much of the time
markets tend to react to related markets and may ignore others
entirely.
If you trade all the same sorts of market, you are likely to be amplifying
your peaks and troughs which isn’t particularly desirable.
Where to look – Finding different markets can be a pain and not
everyone knows where to look. It needn’t be a tough task though.
A list of products available from your broker is a great start although many
specialize in certain types of instrument. A great way of identifying
stocks is by using a stock screener.
However, not all of them are especially helpful as they neglect to include crucial data such as daily volume.
finviz.com has a nice screener and in fact it’s a good starting point for other
market types too.