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Volatility

The second important consideration in determining which markets to day trade is volatility. Not all traders think of volatility in the same operational way as I do. For the purposes of this discussion, I consider volatility to mean "large trading range" on any given day. Preferably, the market you are considering for day trading should have, at the very minimum, a recent history of fairly large trading ranges. Given that dollar values for different markets are based on contract specifications and tick value, the best way to determine volatility's to convert the daily trading range into dollars, rather than to make comparisons based on points.

Here are a few examples that will illustrate my point about volatility very clearly. First, let's consider the example of Eurodollar futures. Assume that the market trades in a range of 20 points in 1 day. In this example, a range of 20 points in 1 day multiplied by 25 dollars per point equals $500. Deducting the cost of commissions, assuming slippage on entry and exit, the bottom-line or net profit, assuming one could capture most of the daily trading range, might only be 15 ticks. The end result would be a net profit of only $375. Given that Eurodollar futures' trading range is considerably less than 20 points, you can see that it is unfeasible to day trade the Eurodollar futures market unless you are a floor broker.

On the other hand, consider the case of Treasury bond futures. The average daily trading range in this market is frequently 25 ticks. At approximately $32 per tick, a 25-tick daily trading range is approximately $900. This is a very respectable trading range for day traders and is certainly much more palatable and workable than the $375 trading range given in the Eurodollar example above.

The quintessence of all day-trading markets at the time this book is being written is, of course, the S&P 500. Rarely a day goes by without S&P trading in a range of less than 600 points. This represents a sizable dollar amount. Clearly the S&P 500 futures market is the preeminent day traders market. The good news is that S&P 500 futures are not only volatile but also show large trading volume each day. It is this combination that makes the S&P 500 market ideal for day traders.

The Double-Edged Sword

As you can clearly see, the ideal market for day traders is the market that has both range and volatility. Both elements must be present in sufficient degree in order to make day trading viable as well as potentially profitable. The successful day trader, however, must always bear in mind that volatility and trading volume constitute a double-edged sword. While they help create day-trading opportunities, they are also responsible for the wide trading swings that frequently cause day traders to take losses. Volatile markets "giveth and taketh away." Just as a volatile market will help the day trader by presenting opportunities, volatility will also create price swings that have the potential to cause losses by hitting your stop losses.