Volume/liquidity rules of thumb

[cuttlefish]

Any of you experienced technicians/traders have any rules of thumb in relation to how much stock to buy vs underlying daily volumes/liquidity?

I'm looking for whether there's any accepted rules of thumb for how much stock to hold overall and also how much stock to buy/sell/trade on any particular day vs daily volumes/liquidity.

I'm assuming these rules would vary for day trading vs short term vs longer term as well, just curious to hear peoples thoughts on this.

 

[yonnie]

I`m trading penny stocks short-term and I`m not looking at trading volumes but at the market depth of the stock.

So if I look at AEX @ 0.025 and 4 million shares on the buy side @ 2.5 level, I`ll go in for 25% of that demand and my buy order would be 1 million shares max.

 

[Timmy]

I suppose one rule of thumb when buying in is to be aware of how you are going to get out. Especially under "stop loss" conditions. How does no more than 5% of a typical day's volume sound? Also, does the stock have a record of consistent volumes each day? Its not nice to be trying to get out on a a day when there is no activity in the stock, or the spread is wide enough for a few trucks to drive through.

 

[yonnie]

thats right. I want to be able to get out quickly if the trade moves against me.

thats why I dont look so much at the daily trading volume but more so at the amount of shares people wanting to buy for that price level

 

[Timmy]

thats right. I want to be able to get out quickly if the trade moves against me.

thats why I dont look so much at the daily trading volume but more so at the amount of shares people wanting to buy for that price level

The people wanting to buy are there now (or are they? Market depth is easy to stack, the orders can be pulled with the click of a mouse), not necessarily when the time comes to get out?

That is why I want to see a consistent history of good volume each day, at least in the recent past, it is a sign of reliable trading activity; it is not that good a sign but it is probably all that can be looked for.

 

[yonnie]

The people wanting to buy are there now (or are they? Market depth is easy to stack, the orders can be pulled with the click of a mouse), not necessarily when the time comes to get out.

that when experience with that particular stock comes into play

 

[Timmy]

that when experience with that particular stock comes into play

fair enough!

 

[stargazer]

Hi yonnie

yonnie
So if I look at AEX @ 0.025 and 4 million shares on the buy side @ 2.5 level, I`ll go in for 25% of that demand and my buy order would be 1 million shares max.

Could you explain the above is that .025cents and 2.5 buy?

Cheers
SG

 

[Wysiwyg]

The people wanting to buy are there now (or are they? Market depth is easy to stack, the orders can be pulled with the click of a mouse), not necessarily when the time comes to get out?

That is why I want to see a consistent history of good volume each day, at least in the recent past, it is a sign of reliable trading activity; it is not that good a sign but it is probably all that can be looked for.

I have been researching this trading criterion and haven't come to a conclusion on what rule achieves the better result.
Liquidity for individual stock is hard to define. Maybe an average volume over a short time frame has to be compared to an average over a longer time. Realistically it is only average volume that can be worked with.

Still looking.

 

[$20shoes]

Yes, not an easy one to define.
Volume can just dissipate like that. CYS is a good example. It was turning over 2 million shares a day one month ago, and now that traders have jumped off it...well today volume was a measly 6590 shares. It's important that once you are in a stock, you can gauge whether the level of interest is dying off (more for penny stocks) and act on that.

 

[SuperGlue]

Quote from an interview of Dan Zanger by Stocks & Commodities magazine (2006):

"What would be a typical size of your trades today?

It depend on the volume. If a stock trades 6 to 10 million shares a day. I can be happy owning 100,000 shares. If the stock trades only one million shares a day, then owning no more than 20,000 to 30,000 is about max."

That works out to roughly 1 to 3%.

 

[Wysiwyg]

That works out to roughly 1 to 3%.

Just wondering how he arrived at the figure? Would have been an average surely because he does say "shares a day". But the average over what period?

That is what I am trying to define. How to isolate stock that have a high enough turnover to trade. It is probably too variable to define a rule for.

 

[nunthewiser]

simple really ... IF the stock is not liquid enough for your purposes of entrys and exits or within your risk paremeters BECAUSE of large spreads and illiquid depth..........trade something that is.

Plenty of stocks out there to choose from , why worry about those that dont suit your liquidity and position sizing needs.

 

[CapnBirdseye]

This is a great question and something I have only started to think about quite recently.

This is all built in to your strategy and risk profile. I generally trade small and mid cap stocks.

In the past I have been trying to offload almost 20% of a days trading. This can be done, but forward planning and patience is required. You also have to look for a gap in the DOM so as not to force other sellers down the depth.

For me, something like 5% of an average day is ok. 20% is possible, but not good if you want to close a trade pretty quickly. I have a bad habit of opening new trades before I close a trade to finance another. This can cause a few problems (and sometimes be profitable) and is something I don't recommend.

 

[Wysiwyg]

simple really ... IF the stock is not liquid enough for your purposes of entrys and exits or within your risk paremeters BECAUSE of large spreads and illiquid depth..........trade something that is.

Plenty of stocks out there to choose from , why worry about those that dont suit your liquidity and position sizing needs.

Yes the normal way is looking the best at the moment.

This is all built in to your strategy and risk profile. I generally trade small and mid cap stocks.
In the past I have been trying to offload almost 20% of a days trading. This can be done, but forward planning and patience is required. You also have to look for a gap in the DOM so as not to force other sellers down the depth.

Exit
From entry to indicated exit could be several months and during that time the 'liquidity' could dry up as $20shoes pointed out.

Entry
A scan for stocks with average volume above 50000 for the previous 10 bars turns up a selection. Filter out stocks under 20c would then narrow the field down some more. Something to work with there I think.

 

[yonnie]

I only trade shares up to 2 cents and I only look at turnover per day and not at shares sold per day.
Obviously a stock at 0.2 cents needs more volume than a stock at 1.9 cents, so $ turnover is the way to go.

I trade parcels of $ 4/6/8 thousand per stock and the amount of money I pour into a stock depends on the average turnover per day over the last 2-3 months.
I exclude trading days where there have been excessive interest in the stock.

I`m quite happy to buy $ 4,000 worth of shares if the daily turnover is at least $ 6,000 etc., because generally the bid volume is higher than the daily turnover at that price level.
But then I`m trading full time and am out quick if the situation gets hairy.

 

[Wysiwyg]

I only trade shares up to 2 cents and I only look at turnover per day and not at shares sold per day.
Obviously a stock at 0.2 cents needs more volume than a stock at 1.9 cents, so $ turnover is the way to go.

But the number of shares traded is represented in a dollar value. If 300,000 shares are traded at 2c then the dollar value is $6000. Doh. That is turnover.

I trade parcels of $ 4/6/8 thousand per stock and the amount of money I pour into a stock depends on the average turnover per day over the last 2-3 months.
I exclude trading days where there have been excessive interest in the stock.

I did a scan (because I had a fair idea this is unusual ) for stocks under 2c that had an average turnover greater than $6000 or in share numbers 300,000 for the last 50 trading days (2 1/2 months). The scan came up with 9 stocks on the ASX that met these parameters.

I`m quite happy to buy $ 4,000 worth of shares if the daily turnover is at least $ 6,000 etc., because generally the bid volume is higher than the daily turnover at that price level.
But then I`m trading full time and am out quick if the situation gets hairy.

Good luck.

 

[AlterEgo]

I generally trade approx. $10K per position, and my rule of thumb is to filter out any stocks with an average turnover per day of less than $200K, so that’s 5% of daily turnover. But I’ll also filter out any that appear to have low liquidity when looking at the graphs – such as erratic price fluctuations, many low or no volume days, etc. I’ll also look at the market depth to see what sort of volume is at each level to estimate how much slippage I’d be likely to get.

 

[yonnie]

wysiwyg,

I also trade shares under 1 cent which dont have a daily turnover of >$ 6,000 but have millions of shares at the bid to provide a cushion.
Examples are AUZ, ESN, IMI, MPJ etc etc.

all in all I keep track of around 50 companies.

I didn`t mention this in my earlier post, because I dont think people generally trade shares priced this low.

 

[nunthewiser]

wysiwyg,

I also trade shares under 1 cent which dont have a daily turnover of >$ 6,000 but have millions of shares at the bid to provide a cushion.
Examples are AUZ, ESN, IMI, MPJ etc etc.

all in all I keep track of around 50 companies.

I didn`t mention this in my earlier post, because I dont think people generally trade shares priced this low.

Um please tell me how you trade AUZ ?

Not enough sells into 1 to buy IF you are lucky enough to get moved up the queue .only been trading from 1>2 in months . sorry mate but saying buy at 1 and sell at 2 dont happen in the real world when trying to join the endless queue at 1.

I take it you dont use stoplosses either as the trades on IMI in past have been between 3 and 4 .so you either dont use a stoploss OR 25% or 33% is it ?

Sorry bud but I also trade penny dreadfuls and a lot of what your saying may sound good BUT in the real world its a different kettle of fish

Have a great day.