Know Your Markets

8/6/2019 Know Your Markets

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Knowing Which Markets to Trade

New traders are drawn to the E-mini S&P 500 like bees to honey. Go into any livetrading room and chances are the moderators are teaching traders to trade the E- miniS&P 500 because it has more liquidity than any other market. In Figure 1: Average

Annual Volume Comparison, we compare the average annual volume between thefollowing E-mini indexes: E-mini S&P 500, Dow, Nasdaq, S&P MidCap 400, and theRussell 2000

Figure 1: Average Annual Volume Comparison

Looking at Figure 1 above, it would be a logical assumption that the E-mini S&P 500moves more than any other market. After all, volume fuels the markets and the E-miniS&P 500 definitely has more volume than any of the other indexes. However, let's take acloser look to see if the E-mini S&P 500 leads in tick movement or dollar movement.

Figure 2: Average Annual Tick Comparison compares average annual tick movementbetween the following E-mini indexes: S&P 500, Dow, Nasdaq, S&P Mid-cap, and theRussell 2000. As you can see, the E-mini S&P 500 is no longer the leader. In fact,during the eight year analysis period, although the E-mini S&P 500 had the highestvolume, it was the lowest in tick movement when compared to the other markets.


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Figure 2: Annual Average Tick Comparison

If volume fuels the markets and the E-mini S&P 500 has the most volume, why is itconsistently lower in tick movement than the other markets? Perhaps, we need tocompare the average dollar movement since each market have different tick values.

Figure 3: Annual Average Dollar Comparison compares the annual average movement in

dollar amounts of the E-mini S&P 500 with the following E-minis: Dow, Nasdaq, S&PMid-cap, and Russell 2000. While the E-mini S&P 500 is not the lowest in dollarcomparison to the other markets, it is definitely not the leader. In fact, when comparingjust the indexes, the E-mini Dow is the leader in ticks but the E-mini Russell 2000 isconsistently the leader when comparing dollar amounts. (This is due to the difference intick values. The E-mini Dow is $5 per tick and the E-mini Russell 2000 is $10 per tick.)


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Figure 3: Dollar Comparison

So, why are traders drawn to the E-mini S&P 500? They lack experience and research.For a professional or institutional trader with a large account and a high degree ofaccuracy, liquidity is the primary concern. These traders often trade more than onehundred contracts at a time and may have a profit target of only one point. A relatively

small profit target multiplied with a high number of contracts can be extremely lucrative.

For example, in 2009 the average annual tick movement for the E-mini S&P 500 was 88ticks or 22 points. The professional or institutional scalper then looks at the liquidity ofthe market (volume) to ensure they can easily enter with their specified number ofcontracts. During 2009, the average annual volume on the E-mini S&P 500 was2,117,078. A professional or institutional scalper can easily enter with one hundredcontracts. They set a one point profit target and a one point stop. If they win they have anet profit of five thousand dollars. Of course, if they lose, they have a loss of fivethousand dollars. However, experience is on their side and their account is sufficient sothat one or two losses will not wipe them out.

These volume traders are not the average trader that we see in the markets today. Today,most traders came into trading after being laid off between 2007 and 2008 from otherprofessions. Most of these traders are not trading in volume but are looking to make twoto four points a day, trading anywhere from one to ten contracts. And, while the E-miniS&P 500 may seem to be the most logical market, these traders should take a look atother markets. For example, the E-mini Russell 2000, commodities or currenciesmarkets.


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Figure 5: Average Annual Tick Movement for Commodities

However, as with the indexes, you cannot look at tick movement alone because eachsymbol has a different tick value. Figure 6: Average Annual Dollar Movement forCommodities shows the average annual movement in dollars. Again, we see that dollarfor dollar, up until 2006, the indexes moved more. However, as of 2006, thecommodities began moving more, dollar for dollar.


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Figure 6: Average Annual Dollar Movement for Commodities

Are commodities the only group that move more on average than the indexes? No.Figure 7: Average Annual Volume for Currencies shows that the currencies have alsobeen increasing in volume, consistently, since 2007.


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Figure 7: Average Annual Volume for Currencies

Of course, we want to make sure that the movement correlates with the volume,especially with the Eurodollar as it has significantly more volume than the others. Figure8: Average Annual Tick Movement for Currencies shows that, although the BritishPound leads the other currencies in tick movement, the Eurodollar is the second highestcurrency in tick movement.


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Figure 8: Annual Average Tick Movement for Currencies

Since each currency has a different tick value, we most also compare the average annualdollar movement. Figure 9: Average Annual Dollar Movement for Currencies showsthat the Eurodollar leads the currencies in movement, dollar for dollar. Again, whencomparing the currencies to the indexes, we see that the currencies moved less, when

comparing dollar for dollar, than the indexes up until 2006. Then, in 2007, thingschanged. Most of the currencies began moving more, on average, than the indexes withthe exception of the E-mini Russell 2000. Although the Eurodollar and Japanese Yenconsistently move more than the E-mini Russell 2000, dollar for dollar, they are theexceptions. The E-mini Russell 2000 consistently outperforms most of the othercurrencies, when comparing dollar for dollar.


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Figure 9: Annual Average Dollar Movement in Currencies

While most traders believe that the currency movements are directly related to theirrespective market openings, statistics show this is not the case. For example, mosttraders believe the only time to trade the Eurodollar is during the London session.However, Figures 10 - 15 below, show that, just like the indexes and commodities, thehighest overall currency movements actually occur during the U.S. market opening

periods, specifically from 9am Eastern Time to Noon Eastern Time.

Figure 10: Australian Dollar - Average Annual Tick Movement by Hour


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Figure 11: British Pound - Average Annual Tick Movement by Hour

Figure 12: Canadian Dollar - Average Annual Tick Movement by Hour

Figure 13: Eurodollar - Average Annual Tick Movement by Hour


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Figure 14: Japanese Yen - Average Annual Tick Movement by Hour

Figure 15: Swiss Franc- Average Annual Tick Movement by HourDoes this mean that the only time to trade the currencies is during the U.S. market hours?No, it does not. The U.S. market session has the highest movement in ticks ANDhighest in volatility. For beginning traders, trading the most volatile session is oftendifficult. Therefore, these traders may consider the London session or even the Asiansession, which is the slowest of the three.

But how do you know what to trade and when? First, let's look at the overall movementand see what moves and when. Figures 10 - 15 above identified when the currenciesmove. Figures 16 - 24 show the average annual tick movement by hour for Crude Light,Gold, Platinum, Silver, E-mini S&P 500, E-mini Dow, E-mini Nasdaq, E-mini S&PMidCap 400 and E-mini Russell 2000.


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Figure 16: Crude Light - Average Annual Tick Movement by Hour

Figure 17: Gold - Average Annual Tick Movement by Hour

Figure 18: Platinum - Average Annual Tick Movement by Hour


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Figure 19: Silver - Average Annual Tick Movement by Hour

Figure 20: E-mini S&P 500 - Average Annual Tick Movement by Hour

Figure 21: E-mini Dow - Average Annual Tick Movement by Hour


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Figure 22: E-mini asdaq - Average Annual Tick Movement by Hour

Figure 23: E-mini S&P MidCap 400 - Average Annual Tick Movement by Hour


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Figure 24: E-mini Russell - Average Annual Tick Movement by Hour

Analyzing all the information from the charts, we can surmise the following:

Currencies move the most during 8am - Noon Eastern Time (U.S. market opening). Thesecond highest is the London opening (3am Eastern Time) and the least amount ofmovement occurs during the Asian opening (7pm Eastern Time).

With the exception of Crude Light, the other commodities move very similar to thecurrencies. Specifically, the biggest movement is during the first four hours of a marketopening with the U.S. leading, followed by London and then Asia.

Now we can drill down even further by comparing the total average tick movement forthese periods. We will compare the first four hours of movement for each marketopening. Additionally, we will also compare the periods from Noon to 4pm Eastern

Time for Crude Light and the indexes.

Figure 25: Currencies: Average Annual Tick Movement by Market Opening shows thatthe British Pound leads all the other currencies during each of the market openings,followed by the Eurodollar.


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Average A

However, again, we need tomovement in dollar amounts.per Market Opening in Dollafollowed by the Japanese Yesession).

Average Annual

Now that we have identifieddollar amounts, we need to vCurrencies - Average Annua

0

20

40

60

80

100

120

140

160

180

200

Asia

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Asia

Figure 25: Currencies -

nual Tick Movement by Market Opening

ompare dollar for dollar to see which has the gFigure 26: Currencies - Average Annual Tick

rs shows that the Eurodollar leads in dollar amo(with the exception of the British Pound durin

Figure 26: Currencies -

ick Movement per Market Opening in Doll

the symbols with the highest movement in botherify that this correlates to the volume. FigureVolume for Market Openings shows that the E

London US

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eatestMovementunt,g the London

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ticks and7:urodollar

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leads the other currencies inof the British Pound during t

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BP

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Figure 27: Currenci

We have now identified thatsymbols to trade during thesufficient volume overall (de

Now, let's look at Gold, Platiand volume comparisons. FiMovement per Market Openiand then Silver.

Figu

Average An

However, since each symboldollar to see which leads in dAverage Annual Tick Movesymbol in dollar amount hasfollowed by Platinum and th

0

50

100

150

200

250

300

Asia

olume, followed by the Japanese Yen (with the London session).

Asia London US

4,918 24,479 65,827

4,029 9,970 27,074

1,631 10,023 23,565

2,058 4,912 13,136

904 3,200 16,577

669 4,973 14,859

es - Average Annual Volume for Market Op

the Eurodollar and Japanese Yen are the best cusia, London and U.S. market opening sessions,

pendent on trading size).

num and Silver to see which leads the others ingure 28: Gold, Platinum and Silver: Averageng shows that Platinum leads the symbols, foll

re 28: Gold, Platinum, and Silver:

ual Tick Movement per Market Opening

has a different tick value, so we must compareollar amounts. In Figure 29: Gold, Platinum, aent per Market Opening per Dollars shows tha

changed. Silver leads the other markets in dolln Gold.

London US

exception

nings

rrencyas well as

tick, dollarnnual Tickwed by Gold

dollar fornd Silver -the leadingr movement,

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SI


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Figu

Average Annual

And, how does the volume cAnnual Volume per MarketSilver and then Platinum.

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SI

FiguAverag

Since we have a discrepancyfollowed by Gold then Silvethen Gold. In volume comp

To determine which market tthe time period that we can tsession, with 2 contracts, weand we need to make sure th

However, if we are looking tlook to trade either Gold or Sthe same size, again, we woudollar movement, we wouldto trade 50 contracts, then wopening and, specifically to

0

500

1000

1500

2000

2500

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Asia

re 29: Gold, Platinum and Silver -

ick Movement per Market Opening in Doll

rrelate? Figure 30: Gold, Platinum and Silverpening shows that Gold leads in volume, follo

Asia London US

2373 5656 36516

109 178 669

461 1228 9272

re 30: Gold, Platinum and Silver -Annual Volume per Market Opening

between all the charts. In tick movement Plati. In dollar comparisons, Silver leads, followedrisons, Gold leads, followed by Silver and then

o trade, we must look at what our trading size iade. For example, if we were going to trade thwould look to trade Gold since Gold has the hit we can enter and exit without a lot of slippag

o trade the London session, with the same size,ilver. And, if we are looking to trade the U.S. sld trade either Gold or Silver. Since Silver hasut our capital to work there. However, if we wwould need to limit our trading hours to the U.old since Gold has the highest volume.

London US

rs

- Averageed by

um leads,by PlatinumPlatinum.

, as well asAsiahest volume.

e wouldession, withhe highestere lookingS. market

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Remember, earlier we identitherefore, decided to includeIndexes and Crude Light - Athat Crude Light leads the otmini markets: Dow, Nasdaq,

Fig

Average A

Since tick movement can bedollar movement by market

Annual Tick Movement perother symbols in dollar comp

0

50

100

150

200

250

300

Asia

ied Crude Light as trading more like the indexeour analysis of Crude Light with the indexes.erage Annual Tick Movement by Market sessier markets in tick movement, followed by theand Russell 2000.

re 31: Indexes and Crude Light -

nual Tick Movement per Market Session

isleading, we want to also compare the averagessions. Figure 32: Indexes and Crude Light -

arket Session in Dollars shows that Crude Ligarison during all the market sessions.

London US AM US PM

s and,igure 31:ns shows

ollowing E-

e annualAverage

ht leads the

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Fig

Average Annual

However, depending on thechanges. During the Asia seLondon session, The E-minisessions the leaders are E-mi

Again, we need to compare twithout a lot of slippage. Fi

per Market Session shows thand Crude Light lead the listidentify that the U.S. afternomorning session (US AM) wand Dow.

Therefore, we must now detedown even further. If we areof the leaders, as there is sufnumber of contracts to 100, tthe E-mini S&P 500 or Dow

0

500

1000

1500

2000

2500

3000

Asia

re 32: Indexes and Crude Light -

Tick Movement per Market Session in Dolla

arket session, the leader for the indexes dollarsion, the E-mini S&P 500 and Dow lead. DuriS&P 500 and Russell 2000 lead. During the U.ni Russell 2000 and S&P MidCap 400.

e volume to ensure that we can enter and exit ture 33: Indexes and Crude Light - Average An

at during the Asia and London sessions, the E-in volume, followed by the E-mini Nasdaq. Wn session (US PM) actually has higher volume

ith the highest volume coming in on the E-mini

rmine how many contracts we are going to tradgoing to less than 10 contracts, we could probaicient volume for 10 contracts. However, if wehen we would be wiser to limit the markets to oduring the afternoon session of the U.S. market

London US AM US PM

rs

comparisong the

S. market

e tradesnual Volume

ini S&P 500can also

than the U.S.S&P 500

e to narrow itbly trade anyincrease the

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Asia London US AM US PM

ES 10244 35870 466205 546334

YM 787 2345 41282 54787

NQ 1111 3711 108037 132903

EMD 28 84 7241 8845

TF 138 487 44955 57761

CL 1414 4744 44660 71680

Figure 33: Indexes and Crude Light -

Average Annual Volume per Market Session

We now must determine reasonable profit targets and stops for trading the markets wehave chosen. At TradersHelpDesk.com, we teach new traders to use 10% of the averageannual range as a minimum profit target. Since we always try to achieve a risk to rewardratio of 1:2, we simply divide our minimum profit target by 2 to identify the stop value.

Based on the formula above, if we decided to trade the Eurodollar, during the Asiasession, our first profit target would be eight ticks (rounding up) and our stop would befour ticks. Trading the Eurodollar, during the London session, our profit target would be12 ticks and our stop would be six ticks. And trading the U.S. market opening, our profittarget increases to 16 ticks, with an eight tick stop.

We can also use this formula to decide which of the leaders to trade or not trade. Forexample, we identified that the E-mini S&P 500 was the best market to trade during theAsia session based on volume. However, when we apply the formula, our minimumprofit target is only two ticks. Therefore, we discard trading the E-mini S&P 500 during

the Asian session and look at the other markets that were identified. We identified Goldand Crude Light as tradable using both the tick movement and volume, provided that wewere only trading a low number of contracts. The minimum profit target for both Goldand Crude Light is eight ticks, thereby giving us a four tick stop.

By simply researching our opportunities, we have identified the markets to trade, when totrade, and set reasonable profit targets and stops.

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