# Liquidity tolerance



## It's Snake Pliskin (28 July 2010)

Just curious as to what tolerance people have for liquidity of a stock and how they may determine their tolerance. Is it a percentage over a period? Is it a figure that must have volume higher than it? etc... 

I sometimes see some good opportunities to get in but don't due to liquidity concerns. The exit and getting a good fill is my concern.


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## skc (28 July 2010)

It's Snake Pliskin said:


> Just curious as to what tolerance people have for liquidity of a stock and how they may determine their tolerance. Is it a percentage over a period? Is it a figure that must have volume higher than it? etc...
> 
> I sometimes see some good opportunities to get in but don't due to liquidity concerns. The exit and getting a good fill is my concern.




Surely it depends on your trading timeframe?

With "investment", average daily turnover = 5 x exposure was something suggested by one fundamental analysis mob.

Personally, I don't trade anything that has a spread wider than 3-4 ticks (which is always a sign of lack of liquidity). My trading are usually 3-10 days, but when I exit I like to be able to exit straight away...


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## Dracuu (28 July 2010)

All stocks that I consider must have a 20 day average (volume x close) of 5 million or more. I set up an exploration in Amibroker to scan for stocks that pass the liquidity test before I even look at them.
Moving the market on entry is not always a problem but if you move it on exit it could be a huge problem.
You also need to consider the minimum step movements of the different price levels as slippage can be exaggerated. Trade a big position on a lower volume stock under .50 that moves in .005 increments is a recipe for disaster.


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## It's Snake Pliskin (30 July 2010)

Two good responses and different perspectives due to individual situations. Good stuff. I'm interested in the psychological aspects and how people tolerate different levels of liquidity to the minimum acceptable level.


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## tech/a (31 July 2010)

Snake

Its an interesting question
One that most people have their own spin for "Risk management"

But If you find a stock with terrible liquidity that liquidity doesn't become a problem when it does as you expect---fly!
In fact using a high liquidity filter can indeed leave you out of a trade which becomes extremely profitable.

My answer would be to accumulate a position over a week or so if you see potential (technically or fundamentally) and when you get your quick rise sell into those late to the party.

If all fails just sell out at a limit price---but be prepared for it to take a while.


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## yonnie (31 July 2010)

I suppose it depends on what you trade.

I`m trading the penny stocks and I dont look at the trading volume for a period, but the volume on the bid.
prefer my order not to be over 20% of volume at the bid and strive to be at the top of the queue.
this will lessen risk and maximise profits if you think about it.

mind you I`m not investing, but am a scalper and I`m in and out in minutes up to months depending on the price action.


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## springhill (31 July 2010)

Hi Snake, these are generally the types of stocks that i target. My set of criteria are;
1. Have within 40-250m shares issued. I don't buy millions of shares, so i'm better off being a smaller  fish in a smaller pond. That way i feel i can control the risk of being over run by massive sellers.
2. At or near cash value. Gives me some peace of mind about the fundamentals of where the safety in a bottom is. Not always the case though.
3. Enter before or at the time a drilling program is announced. Looking through quarterlies for future programs and marking them on a calender helps me. Get ahead of the rush and the laggards.
4. Quality management. Self explanatory.
5. Quality project.

This is not set in concrete, but would be the rule 90% of the time. This way i feel i have controlled as much as i can, and let the short supply of shares do the work for me when i does move, as things invariably do when a drilling program is underway. As tech says when there is movement in illiquid shares, they can most fast. Recently it worked well for me with BTU (bought @8c, took profit @ 18c, freeholding now), missed out on CYS (16c to 34c in a week) because i didn't have the balls to keep my bid on (self doubt crept in) and have entered GMM (av 9.3c) on the same principle. Currently combing quarterlies for more potentials.


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## Synergy (3 August 2010)

I trade sub 50c stocks and for me liquidity is probably the biggest unknown and probably the biggest risk. I often get caught with stocks that go very quiet, but thats part of the risk involved in what i trade.

Putting too much of a restriction on past volume (say a 20 day avg) really limits my gains. Stocks with low liquidity can very suddenly find it, and once they do can rise very quickly. I do use a 20 day volume filter for my entry, but it's lower than my trade amount. I also use a zero volume count filter. I'd rather trade a stock that trades $10,000 every day over one that trades $200,000 one day and then nothing for 19 days. Averages don't show the whole story. 

Also something to consider is whether you use the past few days in your volume avg - especially on a breakout system. A day or 2 of massive volume can distort the truth.

I also use a low volume limit once i hold a stock to try and exit once things start going quiet, but sometimes this is just too late.

I've learnt to ignor on screen market depth. Although obviously it's some indication of liquidity, some of the biggest movers have very low on screen depth, but yet reasonably high liquidity.

My tolerance for liquidity is probably much higher than most, but I wouldn't say that i'm totally comfortable with my current level of liquidity risk.


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## It's Snake Pliskin (3 August 2010)

Synergy said:


> I trade sub 50c stocks and for me liquidity is probably the biggest unknown and probably the biggest risk. I often get caught with stocks that go very quiet, but thats part of the risk involved in what i trade.
> 
> Putting too much of a restriction on past volume (say a 20 day avg) really limits my gains. Stocks with low liquidity can very suddenly find it, and once they do can rise very quickly. I do use a 20 day volume filter for my entry, but it's lower than my trade amount. I also use a zero volume count filter. I'd rather trade a stock that trades $10,000 every day over one that trades $200,000 one day and then nothing for 19 days. Averages don't show the whole story.
> 
> ...



Interesting Synergy. 
Yes average volume can be misleading especially when there are periods or one off days that have outlier volume days which totally influence that average. Consistent volume levels are better. You understand your liquidity risk and say you are not totally comfortable with it. That's understandable.


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## skyQuake (3 August 2010)

Liquidity is there except when you need it..
I like to look at avg val done in the open/closing matches.
Give you a decent indication of how much you can do on any given day.


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## It's Snake Pliskin (3 August 2010)

springhill said:


> Hi Snake, these are generally the types of stocks that i target. My set of criteria are;
> 1. Have within 40-250m shares issued. I don't buy millions of shares, so i'm better off being a smaller  fish in a smaller pond. That way i feel i can control the risk of being over run by massive sellers.
> 2. At or near cash value. Gives me some peace of mind about the fundamentals of where the safety in a bottom is. Not always the case though.
> 3. Enter before or at the time a drilling program is announced. Looking through quarterlies for future programs and marking them on a calender helps me. Get ahead of the rush and the laggards.
> ...



Thanks for those comments Springhill. 
I like the small fish in a big pond mindset. Interesting to see how you go through the process of determining your liquidity tolerance acceptance.  

Yonnie,


> I suppose it depends on what you trade.



Yes true. I guess the main issue is can I sell and will the volume help me get the price I want?

Tech,


> Its an interesting question
> One that most people have their own spin for "Risk management"
> 
> But If you find a stock with terrible liquidity that liquidity doesn't become a problem when it does as you expect---fly!
> In fact using a high liquidity filter can indeed leave you out of a trade which becomes extremely profitable.



Yes, clearly from the other comments one's missing of opportunities due to low liquidity intolerance happens. I guess when it flies it would help to have outlier volume so as to get off it when the late comers get on.


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## It's Snake Pliskin (3 August 2010)

skyQuake said:


> Liquidity is there except when you need it..
> I like to look at avg val done in the open/closing matches.
> Give you a decent indication of how much you can do on any given day.



How is that done Skyquake?


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## skyQuake (3 August 2010)

It's Snake Pliskin said:


> How is that done Skyquake?




Manually D:

--------------

Well not always, sometimes i get lazy and just look at vol done in 1st 5min and vol in last 5min.

Last 5min Good for cspa vol, but 1st 5min is at best a guess.


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## It's Snake Pliskin (3 August 2010)

skyQuake said:


> Manually D:
> 
> --------------
> 
> ...



Thanks.


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## springhill (16 September 2010)

Hi Snake re: my last post on targetting low volume/liquidity stocks i thought i'd update current scenario on holdings and entries, and how they have performed since.
Open for criticism.


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## springhill (16 September 2010)

Plus the last 2.


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## springhill (17 September 2010)

An example of where low liquidity can pay dividends very quickly, compare the GMM chart below to the one posted 2 days ago.


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## Synergy (18 September 2010)

Very nice!

Now can you unload at a price above 15c?
If you want to unload of course....


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## springhill (18 September 2010)

Synergy said:


> Very nice!
> 
> Now can you unload at a price above 15c?
> If you want to unload of course....




Hi Synergy, as stated in a previous post i don't purchase MASSIVE amounts of shares in each respective company. Keeping it to a max of 500k (not dollars), so yes generally find it easy to unload at a price i want or within 1c.
Mondays action will determine if i sell a few on these.


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## howardbandy (19 September 2010)

Greetings --

How much liquidity an individual requires is determined by how rapidly he or she needs to exit.

My recommendation for most individuals and small funds is that a stock or ETF trade at least $100 million per day in order to be reasonably certain that a position can be closed out whenever that is desired.

I trade the US markets and there are about 400 issues that pass that filter.  Unfortunately, there are only about 10 that have that much liquidity on the Australian exchange.

As I read about difficulties that major money managers, mutual funds, and hedge funds have had in financial crises, it is almost always because of lack of liquidity.  (Drobny, "Invisible Hands"; Mallaby, "More Money than God")  The hoped for above average return is partially due to their willingness to take on the risk of low liquidity. 

Thanks for listening,
Howard


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## springhill (21 September 2010)

Just posted in the HDG thread, but for me another low liquidity mover today (+30%).


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## It's Snake Pliskin (30 September 2010)

Hi Springhill,

Thanks for the posts in this thread. 
Were you able to get good fills for exits? That is where I see the problem with low liquidity. 
Cheers..


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## springhill (11 October 2010)

It's Snake Pliskin said:


> Hi Springhill,
> 
> Thanks for the posts in this thread.
> Were you able to get good fills for exits? That is where I see the problem with low liquidity.
> Cheers..




No problem, it's a thread i'd like to see continue being added to, as liquidity is part of my strategy.

The only (partial) exit i have taken so far is BTU, though i have a target price in mind for all of them. Having said that, to answer your question, yes if i had chosen to exit at a point, there was sufficient volume for my holding. GMM and HDG are not far from where i want to offload my initail investment, but i have had considerable gain on the back of none to near-no substantial announcements on both, and the price has continued to hold up well.


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## springhill (11 October 2010)

Another low liquidity mover, i personally did not get hold of any (bid was 0.1c too low  but the family business did)
160m shares on issue.


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## Synergy (12 October 2010)

Personally I'd be very uneasy to be holding HDG or GMM. HDG didn't trade today and has a 10% gap between bid and ask.

GMM has closer to a 20% gap between bid and ask.
Are you comfortable seeing their market depths?

Perhaps it would be ok to hold 50000 shares in these types of stocks, but any more and surely you'd run into issues trying to sell? They are not too dissimilar to some I'm holding, but these probably wouldn't make the cut for me.

Sometimes I feel that a reasonable size sell order on the screen would be enough to cause a tumble in price for stocks like these.

Obviosuly nothing wrong with the way you're selecting them though...


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## springhill (12 October 2010)

Synergy said:


> Personally I'd be very uneasy to be holding HDG or GMM. HDG didn't trade today and has a 10% gap between bid and ask.
> 
> GMM has closer to a 20% gap between bid and ask.
> Are you comfortable seeing their market depths?
> ...




For my own personal situation, i am comfortable with the market depths. You're right on the ball Synergy, am holding 100,000 GMM and 50,000 HDG. As i have stated before i like the smaller ponds and while i will never be a millionaire purchasing 10k parcels, this is where i'm comfortable at.
I'd be interested to know where exactly our systems differ, and any criteria other than my own you use.

Totally understand your concerns about one big sell order causing mayhem, but one determined buyer order can light things up aswell. Guess you need a tough stomach and to be able to switch off from worrying about the quiet days.

Thanks for jinxing me with that last comment......


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## springhill (15 October 2010)

Thought i would show how with correct selection (or being lucky ) of low liquidity stocks good profits can be made.
Below are a list of tightly held shares, some i hold, some i don't. All went on a watchlist, but didn't have the capital to invest in all of them, sadly, and their percentage gains. I researched most as the last round of quarterlies were released (some i bought in the months just preceeding).
Bear in mind i had to comb 100+ companies to find these and most are very obscure, but with the right criteria the results kinda speak for themselves. This being said, it has worked well in a rising market, i have not had the opportunity to test in a falling market, though in all honesty i would be hesitant, not necessarily totally against, picking them up.

BTU    +437.5%
GMM   +82.8%
HDG    +63.6%
LEF     +75.9%
QNL    +6%
SOI    +10
WAC   -2.9%
BOE    +450%
CLU    +66.7%
DRK    +34.6%
EAR    +70.4%
GUL    +4.35%
MAR   +84.4%
RUM   +78.1%
SHH   +57.6%
UTO   +10.5
WWW 0.0%

As a footnote, previously mentioned with Synergy, i wouldn't buy bulk quantities of most of these, but for moderate investors they can work exceptionally well.


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## Synergy (16 October 2010)

Springhill,

Very impressive list.
Considering the XSO is up around 20% for the last 3 months, it is certainly a good time for it, but the results above obviously average more than 20%.

I had a look through your list on a 5 year chart and a lot of them look like GFC victims that are only now making some sort of recovery. And the surprising thing is, even though the results look huge, a lot of those rises on a 5 year chart are just a little upwards blip. Most of them look like they could go a lot further. Some lost more than 90% from their highs so I guess + 100% still leaves them at -80%... 

My system is purely mechanical, with many entry citeria. My average hold time is only 7 days. But interestingly, my system has performed better over the last 2 months, than the first 7 months of this year combined. A lot of your list have only made moves quite recently. 

I found looking at those 5 year charts is very encouraging actually. Obviously the GFC hit the spec end much harder, and if they've survived until now, they probably have massive upside. Especially the ones that look to have been totaly forgotten about. I'm wondering if my system is too short term for current times.


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## springhill (20 October 2010)

Synergy said:


> Springhill,
> 
> Very impressive list.
> Considering the XSO is up around 20% for the last 3 months, it is certainly a good time for it, but the results above obviously average more than 20%.
> ...




No doubt some of them are GFC victims, some have also changed direction of interest while not hemorraging hundreds of millions of shares to stay afloat.
In regards to most of my list only moving recently, my aim is to pre-empt the rise, with some there may be an element of knife catching, i'd like to think i've put in enough effort for them not to be a total guess.

How has the consideration of the amount of time you spend in a trade gone?

P.S GUL off with a bang over the last day or 2. That 4.35% rise has now become 106.5%


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