Why Market Liquidity Matters In Financial Trading
Market participants move the markets by creating imbalances between supply and demand, effectively exerting unequal buying and selling pressures that ultimately move the market.
Volatility and Liquidity
What makes emini futures trading really profitable is the ability for them to fluctuate up and down by a huge margin. This is known as volatility.
Emini futures contracts offer a good combination of volatility and liquidity. You have to realise however that volatility is caused by a lack of liquidity and the two are inversely related.
Liquidity means that you can find a buyer or a seller easily at any time you wish to exit your trade. Unlike the highly liquid emini futures markets, there are some stocks and some Option contracts that are highly illiquid from time to time.
What this means is that even if you find yourself winning in a trade, you cannot find a buyer (Or a seller) to close your contract and realize that profit at that price. As a result the broker fills you at a worse price, eating away as much as 40% of your profit.
How Does Illiquidity Affect The Market
Illiquidity in Options results in a massive widening between the Bid and Ask prices whereas in the case of stocks, it may even be impossible to get filled at the desired level.
We had cases during the tech stock market bubble burst of the late 90s where investors were trapped in what were profitable long stock positions. They could not get out. This certainly was not the case with mutual fund investors. They got out instantly!
Illiquidity does affect emini futures trading as well, but only happens through some complacent brokers. As long as you stick with a good futures broker you may never experience bad fills or delays.
Emini Futures Daily Range And Volatility
Markets are affected by the option volatility index (VIX), usually when the VIX is high so is the daily volatility of the S&P 500 emini futures contract, you get big range days. When the VIX is rock bottom, you get small range days. This can help you identify different volatility periods and use a different trading plan, uniquely tailored to that trading period.
A period of wide range days may require longer lasting trades, wider stops, whereas the tight daily range period requires tighter stops and more selective entries. Finally, average expected daily range can be used to estimate the daily high or low in the emini futures markets!
Emini Futures Trading – The Tendency Of Gap Filling
All you have to remember is that volatility and liquidity are inversely related. When you see a gap on the emini charts, it means that there was a huge imbalance between buyers and sellers. 3 times out of 4, gaps that occur at market open are filled. This means that you can trade the S&P 500 emini futures trading contract and just fade these early gaps, 75% of the time the gap will be filled and the market will retrace back to where it gapped from.
If you are interested in profitable emini trading, why not get serious and start investing with the pros today…
