Page 14 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

or sectors, it does not take me more than a few minutes and sometimes less to confirm
a signal.

It needs to be that quick or you will never use it, especially if you are a day trader that is
trading intraday time frames such as the 1-minute. You can use intraday charts for
groups and sectors, too, if you have intraday data for them.
If you are a scalper or trading under 10-minutes, it becomes impractical to view groups
and sectors and stay focused on that short time frame. Activity in groups and sectors
probably won’t be of much help under a 15-minute time frame and is best used for 60-
minute, daily, and weekly charts.

The Importance of Liquidity and Volume

Liquidity is the degree to which an asset or security can be bought or sold in the market
without affecting the asset’s price. For the asset’s price to be unaffected, there must be
a balance of buyers and sellers on both sides of the trade, which offers liquidity to both
the buyers and the sellers at the same time.

When there is an imbalance of buyers and sellers, such as when Enron stock was
falling in 2001 and there were all sellers and no buyers, the stock price will gap down
out of control. This type of event will cause low liquidity for all sellers because there are
no buyers in the market.

Liquidity is extremely important and most traders don’t fully understand the importance
of it until they are faced with an open trade in a market that has poor liquidity such as in
the Enron example above.

Awareness of the importance of liquidity is crucial to avoiding devastation to your
account. Some risk management techniques are useful in softening the effect of a low
liquidity event.

Here are three risk management techniques you can use to lessen the downside
of unexpected low liquidity:

1) Diversify your trading portfolio amongst a variety of sectors
2) Trade with only with ten percent of your net worth

3) Seek markets that are known for high liquidity due to their high volume

See Chapter 13 on money management, for more specifics on how to reduce your
liquidity risk.

Generally, liquidity is reflected in the volume of trades being traded on any given day or
hour or minute. The number of active traders in the market at any time and place will
affect the amount of liquidity. For example, in the S & P Emini Futures market, there is

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