Pick The Right Markets To Trade http://www.netpicks.com/choose-right-markets-trade/

In the trade room, members commonly ask about different

products to trade and one of the key decisions a trader needs to make is to

choose the right markets to trade.

There are many different products out there and finding the right product or

handful of products isn't always so straight forward.

To begin with you need to ask the question of how many markets to

trade. With your particular strategy, how many different markets can you

keep tabs on at any one time?

If you're unable to accurately execute your plan, then it could be that you're

trying to manage too many products at the same time.

If you only trade a single market on the other hand, it may lead to you

seeking trades that are not there and as a consequence, you end up taking

sub-optimal trades.

Some traders will prefer to trade a single product and some will benefit from trading many. It's a balance that needs to be struck and is dependent

on the trader and their strategy.

There's also the question of whether or not the markets that you choose to

trade are always the same products (such as particular stocks or FX pairs)

or whether you can regularly swap out markets in order to trade where the

action is.

The upside of having the flexibility is that you can select markets that you

believe will provide you with the highest number and quality of setups

for your trading strategy.

The downside is that constantly trading different products prevents

you from getting to know any of them intimately well.

If you're trading multiple markets, there is another point to consider.

How correlated are the products that you've selected to trade?

If you choose to trade the Dax and the Euro Stoxx futures for example, the chances are that you will frequently

find them moving together.

This has implications on the level of risk you face if conditions aren't ideal, but also gives rise to another potential

stumbling block.

If the markets you trade are similar and tend to move in sync with one

another, the chances are that you'll get setups occurring very close to one another or even simultaneously - if

you're executing manually, this could be a problem.

The way a market moves is vitally important too. How much is it worth per tick? What's the normal range for

a day? What's the normal volume traded per day? How liquid is the

orderbook? All of these factors make up what your execution and trade risk

will be.

Execution risk is about whether it will be easy to get in and out of a market

at the price you want and for the number of contracts you want,

without too much trouble or slippage.

Trade risk is what you will need to risk in order to find out whether or not a trade will work. A market like the Dax for example, is very thin on the order

book but is pretty liquid.

Slippage may well be an issue, but you shouldn't have too much trouble

getting filled if you are flexible. It also generally moves about a great deal

and therefore the trade risk is likely to be much higher on this when compared to other markets.

Taking things to the other end of the spectrum, the Schatz tends not to move very much during a session

(perhaps around about 12 ticks for the entire Eurex session) and has many

thousands of contracts queuing in the orderbook at any one time.

Having a good awareness of what's going on globally can be hugely

beneficial too. The QE dependence many markets have is a sign of just

how important central bank's policies have been particularly since the

financial crisis.

The recent plummeting value of a barrel of oil has afforded perhaps more opportunities in the energy

markets. Different regions of the world come in and out of market focus.

Recognizing which markets are therefore likely to be in focus over a certain period can help you to select products that are likely to be leading

rather those that are likely to be following.

Selecting the right products to trade comes down to a variety of factors

including those reliant on analysis of your own strategies and what the

markets are doing themselves. You can't expect to be able to cherry pick

the best products to trade all the time,

but what you can do is take account of your own trading strategy, risk

tolerance, market correlations and key market focal points in order to better

choose the right markets for you.