Many traders coming into the Futures markets often ask if there is a minimum number of contracts that should trade each day before a Futures market should be traded for liquidity reasons. This question usually comes from Equities traders because they have been taught to look for good daily volume to provide liquidity. For example, a stock that has at least 1 million shares or more traded daily is said to have good liquidity. Once a trader starts to trade stocks with less volume they run into problems with trade execution due to liquidity problems.
The problem with using that type of formula to determine a good Futures market to trade is that each Commodity has different types of participants and trading styles. The Stock Index Futures typically have a large speculator base as well as commercial (hedgers). This would increase the daily volume tremendously. A market like Live Cattle on the other hand has fewer short term (day traders) speculators than commercial traders (long term hedgers) typically. Comparing the average daily volume of the mini S&P (ES) about 2 million contracts to Live Cattle about 65K contracts does not do much to say if a market is liquid or not.
Some Commodity markets are better for day trading than others. Until the Live Cattle market sold off, partially due to the health issues associated with pink slime, the average daily range was only about $400 from high to low (currently it is much higher). If a day trader came into this market using a $100 stop and a $300 profit target (1:3 risk/reward) they would have to consistently buy the daily low and sell the daily high to make this work. If they entered the trade in the middle of the daily range there was not much profit margin left on a normal trading day. Just imagine how difficult it would be to pick the high and low of a market every day.
The ES on the other hand has an average daily range of about… Continue Reading
