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What Markets to Day Trade?

The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.

shelley

In order for the day trader to succeed, it will be very important to trade markets that have two essential characteristics: They must be actively traded markets, and they must have fairly large daily trading ranges. In other words, part of the formula for success as a day trader is knowing which markets to trade. Essentially, the day trader must restrict his or her trading to markets that have high volatility. Although these markets that are best suited for day trading will not always remain constant, there are ways the trader may ascertain which markets are the best ones to trade at any given point in time.

Here are some guidelines to use in selecting which markets are ideally suited for the purpose of day trading. You will note that I essentially use two parameters: trading volume and volatility.

Trading Volume

The first consideration of the day trader should be the number of contracts that are traded daily. In some cases it will be very clear which markets are the most active. Markets such as the currencies, interest rate futures, and stock index futures will likely remain among the most active for many years to come. However, from time to time as a result of changes in fundamental market conditions, various markets may become more or less active. In the event of drought, for example, the grain and soybean complex markets would become highly active and therefore suitable for day trading. Some markets such as orange juice futures that are normally inactive can become heavily traded during periods of frost and freeze. Such situations when they arise will require that you use your best judgment as to whether day trades are feasible at that time. Ultimately it will always be up to the individual trader to determine whether a market has sufficient trading volume for the purpose of day trading.

In order to assist you in making your decision about which markets to day trade and which markets to avoid in day trading, this section will provide a number of guidelines. Note that none of these are written in stone. Unfortunately, there will always be some degree of judgment that may be involved in making the ultimate decision as to which markets should be traded. Determining a priori all circumstances and conditions that may arise in the future is impossible. Therefore, experience will truly be the best teacher in the final analysis.

In terms of trading volume it's always best to look at the number of contracts actually traded in the contract month that you wish to trade. Please note that the individual number of contracts traded for a particular delivery month is significantly different than the total volume traded for the entire commodity. Treasury bond futures, for example, may show a total volume of 847,000 contracts traded on a particular day; however, the actual volume in the active or nearby contract month may only be 200,112 contracts. While this example illustrates the significant difference between total volume and actual volume for the contract month, the situation in this case would clearly make a lead contract month suitable for day trading. In another situation, however, the lead contract month may not show sufficient trading volume, since most of the activity may be occurring in the back months.

As a general guideline I prefer to day trade markets that have a minimum of 10,000 contracts traded daily in the lead months. Please note that this is a general guideline. In some situations such as coffee futures (as of this writing), trading volume does not meet this minimum criterion; however, the market is still reasonably suited for day trading, provided one follows specific guidelines regarding the use of order entry that may minimize possibly deleterious effects of low trading volume.

Clearly, the best markets to day trade will not always be the same period. As of this writing (1998), the most active and the most readily day traded futures markets based on trading volume alone are as follows:

ж S&P 500

ж Treasury bonds

ж Crude oil

ж Heating oil

ж Swiss franc

ж Deutsche mark

ж British pound

ж Japanese yen

ж Soybeans

ж Coffee

Please note that I have included coffee here in spite of the fact that trading volume does not usually meet the minimum criteria I have indicated above. My reason for including coffee is because it is a market with considerable volatility a vast majority of the time. In this case I am making a decision to place volatility ahead of trading volume.

You may find it interesting to know that the opposite situation occurs in Eurodollar futures. This market trades very heavily in terms of overall trading volume; however, the intraday moves are relatively small most of the time. This market is, therefore, not suitable for the purpose of day trading. Eurodollar futures are, in fact, one of the most actively traded markets in terms of trading volume. We "outside" traders, by which I mean the off-the-floor traders, cannot successfully day trade this market. And this brings us to our second criterion for selecting markets to day trade.