FUTURES LIQUIDITY
Trading liquidity is often overlooked as a key technical measurement
in the analysis and selection of commodity futures. The following explains
how to read the futures liquidity chart published by Technical Analysis
of STOCKS & COMMODITIES every month.
COMMODITY FUTURES
The futures liquidity chart shown below is intended to rank publicly
traded futures contracts in order of liquidity. Relative contract liquidity
is indicated by the number of dots on the right-hand side of the chart.
This liquidity ranking is produced by multiplying contract point value
times the maximum conceivable price motion (based on the past three years'
historical data) times the contract's open interest times a factor (usually
1 to 4) for low or very high volumes. The greatest number of dots indicates
the greatest activity; futures with one or no dots show little activity
and are therefore less desirable for speculators.
All futures listed are weighted equally under "contracts to trade for
equal dollar profit." This is done by multiplying contract value times the
maximum possible change in price observed in the last three-year period.
Thus, all numbers in this column have an equal dollar value.
Columns indicating percent margin and effective percent margin provide
a helpful comparison for traders who wish to place their margin money efficiently.
The effective percent margin is determined by dividing the margin value
($) by the three-year price range of contract dollar value, and then multiplying
by one hundred.
STOCKS
Trading liquidity has a significant effect on the change in price of
a security. Theoretically, trading activity can serve as a proxy for trading
liquidity and equals the total volume for a given period expressed as a percentage
of the total number of shares outstanding. This value can be thought of
as the turnover rate of a firm's shares outstanding.
Trading Liquidity: Futures is a reference chart for speculators.
It compares markets according to their per-contract potential for profit
and how easily contracts can be bought or sold (i.e., trading liquidity).
Each is a proportional measure and is meaningful only when compared to others
in the same column. The number in the "Contracts to Trade for Equal Dollar
Profit" column shows how many contracts of one commodity must be traded
to obtain the same potential return as another commodity. Contracts to Trade
= (Tick $ value) x (3-year Maximum Price Excursion). "Relative Contract
Liquidity" places commodities in descending order according to how easily
all of their contracts can be traded. Commodities at the top of the list
are easiest to buy and sell; commodities at the bottom of the list are the
most difficult. "Relative Contract Liquidity" is the number of contracts
to trade times total open interest times a volume factor, which is the greater
of: 1 or exp (1n (volume) / 1n (5000)) - 2.
Return to October 2008 Contents
Originally published in the October 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
