What Markets to Trade?
What Market Should You Trade?
Different Markets Available
- Stocks
- Currency
- Indexes
- Bonds
- Treasuries
- Futures
- Commodities – E.g. Gold, Oil, Metals, Grains
- Options
- Contracts for Difference (CFDs)
Here is a brief overview of the above tradable markets to give a better understanding of their dynamics.
Stocks (Shares/Equities) – A stock market, or equity market, is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.
Currency (Forex/Foreign Exchange/FX) – FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. Today, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing.
Indexes – Are a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used to benchmark the performance of portfolios such as mutual funds. Index trading involves buying or selling a basket of stocks or an index.
Bonds - A bond is a debt security, in which the authorised issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) and/or to repay the principal at a later date, termed maturity. It is a formal contract to repay borrowed money with interest at fixed intervals.
Futures – Futures are a standardised contract, traded on a futures exchange, to buy or sell a standardized quantity of a specified commodity of standardized quality (which, in many cases, may be such non-traditional “commodities” as foreign currencies, commercial or government paper [e.g., bonds], or “baskets” of corporate equity ["stock indices"] or other financial instruments) at a certain date in the future, at a price (the futures price) determined by the instantaneous equilibrium between the forces of supply and demand among competing buy and sell orders on the exchange at the time of the purchase or sale of the contract. The future date is called the delivery date or final settlement date. The official price of the futures contract at the end of a day’s trading session on the exchange is called the settlement price for that day of business on the exchange.
Commodities – Commodities are things of value, of uniform quality, that were produced in large quantities by many different producers; the items from each different producer are considered equivalent. It is the contract and this underlying standard that define the commodity, not any quality inherent in the product. Commodity prices are constantly fluctuating depending on market forces.
Options - An option is a contract written by a seller that conveys to the buyer the right — but not the obligation — to buy (in the case of a call option) or to sell (in the case of a put option) a particular asset, such as a piece of property, or shares of stock or some other underlying security, such as, among others, a futures contract. In return for granting the option, the seller collects a payment (the premium) from the buyer.
CFD’s (Contracts for Difference) – A contract for difference CFDs is a contract between two parties, typically described as “buyer” and “seller”, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. (If the difference is negative, then the buyer pays instead to the seller.) For example, when applied to equities, such a contract is an equity derivative that allows investors to speculate on share price movements, without the need for ownership of the underlying shares. Contracts for difference allow investors to take long or short positions, and unlike futures contracts have no fixed expiry date, standardised contract or contract size. Trades are conducted on a leveraged basis with margins typically ranging from 1% to 30% of the notional value for CFDs on leading equities.
With so many instruments and market(s) available nowadays it is hard to decide what market(s) to trade. At the end of the day, what market(s) you trade and what timeframes you decide to use are very personal decisions. Everyone has a different trading personality.
The main factors to take into account when try to work out what suits you personally as a trader are:
- Risk Tolerance – Futures are much riskier, than say stocks.
- Patience – Certain markets are much faster moving then others.
- Capital – How much you can risk and what returns you expect.
- Timeframe – Long term or short term trading?
- Market bias you may have e.g. Stock market over currency
- Your personal Psychology
Along with your personal trading aptitude, you also need to consider the liquidity of the market you want to trade and the volatility.
Liquidity
For a market to be tradable there needs to be a fair amount of liquidity. By this, I mean; there needs to be enough volume so that you can enter and exit a trade at any point you want. The worst thing possible would be entering a trade at say $1.00, the market moving up to $1.20 upon which you decide to get out of your trade; however there is only one buyer at $1.00, forcing you to take that price. The chart will also show you the volume on most markets. This information is critical, only trade markets with consistent significant volume.
Market Depth
You can get a rough gauge on the liquidity of a market by looking at the market depth. Most online brokers will have an option to see the first 10 or 20 buyers and sellers of a certain market. If this market depth is patchy, then that market is best avoided. You want to see a lot of buyers and sellers with little to no gap between the prices.
Volatility
For you to make money out of a market, the market needs to move! The more volatile the market, the greater potential for profits. But volatility is a double edged sword, it can also lead to being stopped out more quickly and massive equity swings. Again, you as a trader need to trade within your personal trading comfort zone. Deciding on the volatility level you are comfortable is part of formulating your personal trading plan.
Excerpt from ‘The Everyday Trader’s Stock Market Education Course’
