Liquidity tolerance

[It's Snake Pliskin]

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.

 

[skc]

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...

 

[Dracuu]

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.

 

[It's Snake Pliskin]

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.

 

[tech/a]

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.

 

[yonnie]

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.

 

[springhill]

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.

 

[Synergy]

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.

 

[It's Snake Pliskin]

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.

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.

 

[skyQuake]

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.

 

[It's Snake Pliskin]

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.

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.

 

[It's Snake Pliskin]

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?

 

[skyQuake]

How is that done Skyquake?

Manually D:

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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.

 

[It's Snake Pliskin]

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.

Thanks.

 

[springhill]

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.

 

[springhill]

Plus the last 2.

 

[springhill]

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

 

[Synergy]

Very nice!

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

 

[springhill]

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.

 

[howardbandy]

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