Market Liquidity: Foreign Exchange vs The Stock Market
Is Slippage a Problem?
Let’s face it, every trader on the Planet has wished at some point during their career that slippage did not exist. I for one have cursed at the top of my voice, let alone under my breath, at slippage on an entry or exit. However, every successful trader on the Planet has found a way to deal with it either mentally, technically or most likely with a bit of both. The type of trader you are has a massive bearing on the extent to which slippage can affect you. Investors, long and medium term traders will worry less about slippage because the profit targets involved in this type of trading are generally very large. It is also the case that medium to long term trading often involves entry zones rather than specific entry prices. However, day trading methods, specifically scalping, can be hit hard by slippage, especially if it is excessive. Bearing this in mind it would seem that the logical choice for most day traders would be to choose the more liquid FX market, leaving stocks out in the cold. However, this is not the case. It is possible for stock traders to set a ‘chase factor’ on their entry limit orders. This has the advantage of being able to control slippage. In fact momentum day traders thrive on this order entry system. Coupled with an account with a highly regarded direct access broker and you have the means to be able to enter orders of several thousand shares and control the risk of slippage. Knowing When Not to Trade
Momentum traders are also very adept at picking the times they trade. It is said that knowing when not to trade is just as important, if not more so, than knowing when to trade. Times of poor liquidity, such as lunch times, slow moving markets and pre and post hours trading are often avoided. The concept of picking when you trade is just as important if you trade foreign exchange but not necessarily for the purpose of avoiding slippage. There is no real pre and post hours trading because of the available trading hours with market depth remaining good throughout. It would be naïve to think that slippage plays no part in foreign exchange trading at all. During periods of rapid market movement slippage on market entries and hard stops is commonplace. This activity usually takes place at extremely important data releases such as Nonfarm Payrolls and interest rate announcements. Indeed retail brokers guarantee ‘the price you see is the price you get’ during ‘normal’ market hours but not at times of excessive volatility. Out of Hours Trading
The concept of out of hours trading does not really exist in foreign exchange as it does on say NASDAQ listed shares. During the working week there is always at least one major financial centre open to facilitate trades.
(Table: http://www.passion-trading.com/Articles.marketliquidity.foreignexchangevsthestockmarket.htm) Let us compare this with the NASDAQ. The NASDAQ is restricted to the hours of 09:30-16:30 eastern. Trading outside of these hours is possible but the reduction in liquidity is massive. Price gaps between one day’s close and the next day’s open are commonplace due to this lack of liquidity. If you were to add this to the possibility of company specific and geopolitical news events then huge gaps are possible. At times like this slippage on stop orders can be enormous and gaps can take you past your risk threshold. This is clearly one instant where superior liquidity in the FX market is a massive advantage. Once again it is possible to lessen the effects of these gaps. By using a broker who gives you access to the market out of hours or limiting your exposure to market open hours only you have avoided the problem. It is the case that many forex traders close their positions over the weekend when gaps are possible. This comes down to your trading style as much as anything. If you are a long/ medium term trader then you will have to factor in the risk of gaps. Market-wide Liquidity
Not only is the average daily stock trading volume much lower than in FX but it is also much more diluted. Of the $50 billion changing hands on a daily basis, think how many countries, exchanges and shares this is spread over. Conversely, in the foreign exchange market it is estimated that 85% of the massive $1.8-2 Trillion changing hands everyday is concentrated in only eight major currencies. These currencies can be seen in the table below: USD: U.S. Dollar
EUR: Euro
JPY: Japanese Yen
GBP: Great Britain Pound Sterling
CHF: Swiss Franc
CAD: Canadian Dollar
AUD: Australian Dollar
NZD: New Zealand Dollar
It would be wrong to assume that all stocks have the same levels of liquidity. The fact is that average daily volume and the number of shares outstanding or ‘float’ is the determining factor. If volume is high and there is a large float then executing orders without slippage is more likely. For example, Microsoft (MSFT) currently has an average daily volume of close to 58 000 000 million shares. With this kind of market depth you are far more likely to have an order of 10 000 shares executed without slippage than you are in Sears Holding Corp (SHLD) which has an average daily volume of nearer 2 000 000 shares. Conclusion
So then, if you trade foreign exchange you have the benefits of 24-hour liquidity and market depth. This results in less slippage and potentially more money in your pocket. Case closed then. Or maybe not. The ability to succeed as a trader relies on your ability to adapt and work with the market. Those who choose stocks over forex (and there are a fair few; retail forex has only really been around since the dawn of the internet) are able to deal with liquidity issues and make money regardless. In fact it will seem to these people that liquidity is not even an issue. It is an unavoidable market characteristic that was there before them and will still be there long after they have retired. It is a trader’s responsibility to make the most of the resources on offer to them. So much depends on finding a good broker. Due diligence is vital when making this decision. Two traders executing the same sized order, at the same time, in the same market can experience very different results depending on their brokers. Despite the promise of guaranteed fills it is amazing how many retail forex customers feel aggrieved by the level of service provided them. You need only open your web browser and search for ‘forex broker reviews’ or ‘broker reviews foreign exchange’ to read stories about poor service and order management. Trading profitably is about finding and trading an edge. This edge should make the most of the resources available to you and your characteristics as a trader. It is your goal to work with the market and never against it. The issue of liquidity, or lack of it, is manageable, and manage it you must (there are several pointers at how to do so in this article). Don’t let it be the determining factor in your trading. David Thorpe is a senior contributor for http://www.passion-trading.com a free educational resource centre for traders and investors. The goal of the site is to stimulate the minds of its users, enabling them to achieve a greater understanding the art of trading, thus helping them to become more profitable. |
Other Trading System Articles
Do Trading Systems Really Work? Sometimes we have to forget about all the hype and just think about what is really important. When George Bernard Shaw was asked if he were in the National Gallery and there was a fire, which painting would he try to save. He answered, “The one nearest the door of course.”If you have found yourself searching the web for trading support an ...Problem Solving: The Easy Way To Solve Problems In Life Life is full of problems.The more you solve them, the more new ones come up.And you can sweep problems under the carpet or run away from them.Wherever you go, sooner or later there will be problems for you to solve.Since this is a fact of life, you may as well develop some skills on how to handle problems in life. ...Merrill Bullish on Vietnam Because of its thinly traded market and lack of investment options, global investors often overlook Vietnam’s potential. Not Merrill Lynch.Merrill Lynch has acquired a coveted "trading code" needed to buy and sell shares directly on Vietnam's small but growing stock market. Merrill Lynch obtained the right to directly hold Vietnamese shar ...Investing Psychology - Know Thyself America will continue to be the land of opportunity and regardless of what course our economy takes over the next few years, it's likely that investment opportunities will be numerous and attractive. Companies driven by the ever increasing advancements in technology will emerge, while older companies, out of necessity, will come forth with new p ...Forex Option Brokers The word Forex is derived from combining two words - Foreign Exchange. It deals with buying of one currency and selling of the other at the same time. Over $2 trillion in foreign exchange is transacted everyday.Currency exchange is a new option that has emerged for small investors. Earlier, the market was not easily accessible to small in ...Send Birthday Flowers With hundreds of different birthday flowers and bouquet arrangements to choose from, which one would you like to send?Today hundreds of beautifully designed flower bouquets flood the market. Companies and experts in them are all dedicated in bringing forth pretty flower bouquets as gifts. Usually, you get an option to choose from multitud ...Make Big Profits Using Currency Trading Systems Here we will look at how to use currency-trading systems to catch the big profits from the big moves, and how to pick a currency trading system that will be successful.There are many currency-trading systems for sale, but many don’t live up to the hype in the sales literature, but finding one that makes money is easy - if you know what to ...The Money Management Question: How Much Can I Lose? Disciplined money management makes the difference between success and failure in investing. When considering an investment, too many people ask, "How much can I make?" That's the wrong question. The right question is "How much can I lose?"Let's take the stock market for example (although proper money management applies to all investments) ...Makeover and Remodel Your Motorhome or RV Ten Good Reasons to Remodel Your RV:1.Remodeling is the most economical way to get a true upgrade. As opposed to trading in your RV, remodeling enables you to add the features you need and the look you’ve always wanted at a mere fraction of the cost of a new RV.2.Remodeling is the process of customizing and decorating an RV ...Choosing An Investment Stock Broker If you want one.And I don't recommend any broker with whom to trade who will be giving you advice on what to buy and sell. When a broker speaks it is a eulogy for your money. My definition of a broker is one who makes you broker.The reason I say this is that when I owned my brokerage company I hired and supervised over 300 brokers. ...Part 2: Designing a Trading System in MetaStock In Part 1 of Designing a Trading System in MetaStock, I had discussed the major components you needed to be able to track to create a mechanical entry system. These were measures of price, liquidity, trend, and volatility. The question now is, how do we code this into MetaStock?First, let me offer you the most valuable piece of knowledge ...Consistency in Day Trading If there is a single goal that a trader should have, novice and experienced alike, it should be consistency.Studies have shown that over 80% of traders do not have a trading plan.The most successful traders have a methodology or system that they use in a very consistent manner.Even a bad plan that is used consistently will f ...Franchises Offer Shortcuts, But Not Control Q: I will be retiring this year at age 60 and intend to fulfill my lifelong dream of owning my own business. I'm too old to start from scratch, so I'm looking at several franchise opportunities, including fast food, auto parts, and an accounting service. What should I consider before choosing one? Anthony R.A: Congratulations on the retir ...E Currency Trading is a Scam-Learn the Truth Ok so you are looking to make money on the Internet. Well first let me tell you about E-currency and why not to use e-currency. E-currency trading was a good stream of income and you will see a ton of people on the Internet offering books and guides on how to start up in e-currency exchange. I myself bought a book and joined the e-curr ...Trading Psychology - Adopt the Right Mindset for Big Profits! The fact is the majority of traders lose because they cannot control their emotions. Trading psychology is one of the keys to investment success.A simple fact will illustrate the influence of trading psychology:Why the majority of traders loseThere is one statistic that has remained constant since the beginning of investment ...Why Demo Account Performance Is Often Better Than Real Account Performance Over the past several years, the popularity of online currency trading has grown substantially. Each day, online FX brokerage firms attract new investors - each of them lining up with a glint in their eye, lured in by promises of easy money. Most of these companies allow you to sign up for a free demo account which lets you place mock trades u ...Can I Get Affordable Dental Care? In the United States most companies offer their employees dental insurance, but yet many do not. They slip through the holes of the system – the in-betweeners – that have to pay, but struggle to pay the out-of-pocket expenses.The in-betweeners have two choices, go without any insurance, go to the dentist and take the full attack on their ...Forex Trading – The Six Major Reasons Traders Lose Money In FOREX trading, there are six major reasons traders lose money. If you can avoid these pitfalls then you can join the minority of winners that pile up the big profits consistently.Here are the trading traps that will cause you to lose money:1. The Contrarian’s DiseaseYou should have a contrary opinion to the other Forex tr ...Commodity Trading - Advantages and Disadvantages What Is Commodity Trading?Commodity futures markets allow commercial producers and commercial consumers to offset the risk of adverse future price movements in the commodities that they are selling or buying.In order to work a futures contract must be standardised. They must have a standard size and grade, expire on a certai ...The Hypocrisy of Insider Trading Laws Perhaps Walter Williams and I are the only two people on earth who can see the hypocrisy of insider trading laws. I somehow doubt it, though. Williams wrote a column about a year ago, lambasting these laws and I'm going to pick up where he left off. These laws run counter the notion we accept in every other aspect of society that life is unfair. ...Never Lose at Sports Betting or Gambling Today millions of people are gambling online and placing sports bets online. Some win and some lose. I don’t know about you but I always dreamed that I could never lose and just make money. I never had luck at gambling or sports betting. That is why I tried to stay out of casinos, and the horse track. I was always wasting my money, and blowing i ...Forex Trading Education: Things You Should Know About Forex Trading How difficult is it to make money trading the Forex market? How much time does it take to actually be able to make a living trading the Forex market? These and other important aspects of trading are to be discussed in this article.Trading the Forex market has many benefits over other financial markets, among the most important are: superi ...General Guides for FOREX Trading Newbie Being new to FOREX trading? Don’t worry, getting started in FOREX trading is easy and you can always test your skills first in a demo account before you go ‘live’ with real money. To get started in FOREX trading, we have to get to know what FOREX is. For the inexperienced, FOREX trading involves buying and selling the different currencies of the ...Tools for Traders: Hardware and Software Online trading is gaining popularity because of its efficiency and ease of use. If you are on the trading business, it is important to know the right tools of the trade. Doing trade at home should not pose any problem as long as you have the right hardware and software to assist you in your online trading. One should invest in a sound computer w ...Tips to Finding Other People's Simple Trading Plans Did you know you can make money (and a lot of it) by simply modeling someone else's trading plan? Yes, it is true. Unbelievably, there are many of trading gurus doing it RIGHT NOW.All you do is model your system on an already tested and proven trading plan.If you are new to trading ...
|
