Friday, February 17, 2012
Choice of trading instrument: Is thinner better?
An experienced and profitable trader can probably trade any instrument with some adjustments to his technique. Some momentum type trading also works better on thinner instruments.
For a new price action trader, the correct answer is the more liquid instrument. Why? For many reasons, but mainly because while the bars look great on a thinner instrument, the information they carry is unreliable.
Take b5 today. It was a doji on ES but It was a nice strong bull bar on TF. At first glance it may look like a 2 legged move to the ema or otherwise a sign of strength. The bar triggered and stopped out buyers. On the other hand b5 was a doji on ES and more important, it did not trigger. Shorts below b4 did not get their stops taken out. Pullbacks after entry are of acceptable size.
Stops on thinner instrument need to be larger and unless you are capable of consistently taking targets larger than your stop, you should avoid trading thin instruments.
A new trader should not focus on making money but on doing the right thing and trading correctly. Once your percentage of wins is high, you can simply trade larger size to make the same amount of money that a thinner instrument would provide.
Once your size increases, (a good problem to have) you may not be able to trade thin instruments without significant slippage. That said, a thinner instrument with a small tick size such as NQ is often a good choice for new traders.