In Trading Routine and Psychology

A question I have been asked many times over the years, and it just came up again today.

The simple answer is that it depends on how you're trading.

First, the cliff note answer:

For daytraders, 1-3 instruments is typically more than enough if you are utilizing a full discretionary approach. I go for 2.

Swing traders will likely look at more as a function of their time and strategy itself. You're not going to find opportunities every day on just one instrument, plain and simple. In order to make your strategy feasible, you're also going to need to look at more. In addition, you have the time. While precision is still a major factor in what you're doing, its simply okay as long as you're covering all of your bases.

Now, the why:

Every instrument moves in different ways than the next one, and its all thanks to inventory on the book, or just liquidity. This is why no two instruments move in the same way. As such, they need to be analyzed and traded differently, as well. This is why short-term (and some long-term) algo traders are set up very differently from one instrument to the next. They're different animals.

Liquidity and volume are two totally different things.

When we talk about liquidity, we're referencing resting orders (limit) on the book. Volumes refer to executed and matched, market and limit orders. Over the years I have heard the word “liquidity” used incorrectly over and over again, but this is what it is.

So while the two are related, prices move as a result of the ratio of markets to limits being applied at any given price. The more limits to markets at any given price, the harder it is for prices to move.

As a result, we see varying degrees on volatility across instruments.

So if you ever wonder why instrument x just doesn't get the kick in the pants that instrument y does, its because the proportion of limits to markets on instrument x is much closer than it is for y.

Personally, I always seek to trade things in the Goldilocks zone, where its not too hot, not too cool. In other words, not TOO illiquid but not too liquid, either. The main reason I do this is because I can put a leash on whatever it is I'm trading, much better than I can something like NASDAQ futures. I know who is running prices at any given moment, and what it takes to move prices from point A to B.

The main reason you can't get a strong “leash” on something like NASDAQ futures is because its essentially one surprise after another. Market orders run the show, for the most part. If they're up, price is up and vice versa, and while the do deviate from time to time from limit order activity, its resoundingly clear who is wearing the pants. This is not to say limit orders don't place their feet in the sand at one point or another (they certainly do). But it isn't the norm and you have to be much more careful about what you're doing. Market orders can flip a switch and in seconds, all that analysis is for nought.  So you're essentially just left with trading momentum or price extremes.

A lot of traders (experienced and not) tend to like the excitement of less liquid instruments (like crude oil, DAX or NASDAQ futures) or any other currency pair for that matter that rocks up and down the board all day. My own experience with all of these is that I consistently perform worse than I would on something that consists of more liquidity.

Again, I don't prefer too much liquidity. Even something like E-Mini S&P futures, you'll never see me using it as my weapon of choice. The simple reason for this is movement. While it can and certainly does move, your hour-to-hour volatility isn't my preference.

Precision and accuracy are of course a huge part of all of this.

With a lack of time available and sense of urgency when it comes to execution, you simply want to ensure you're not spreading yourself too thin. It is one of the worst things you can do.

Confusing one instrument's movement with another is much more possible when there's too much on the plate. Multitasking is largely a myth. We can only concentrate on one thing at a time. “Multitasking” entails flipping back and forth between tasks, but with full concentration, one at a time.

Better to do one thing 100% right vs. 5 things at only 50%.

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Showing 4 comments
  • Victor

    Hello Steve,

    Great article, just wondering what instruments are you favorite?


    • Steve W.

      Well I regularly trade Gas and Crude, but for currencies its GBP/USD, then EUR/USD then EUR/JPY

  • Antony Young

    Thanks Steve, good reading, as always :). Be fine. Antony

  • Wes

    Steve, thanks for this one, it came at the most unbelievable time!! I’ve recently switched to trading the more lengthy time frames and have been trying to figure out how many pairs I want to monitor.

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