All trading vehicles are divided into several classes. Their charts may look similar on a computer screen, but don't let their looks deceive you. Each group has its pluses and minuses. They offer different profit opportunities and carry different risks. Choosing what to trade is among your most important market decisions.
We'll review the following major groups to help you make a conscious decision on which to focus:
Whichever group you select, make sure your trading vehicle meets two essential criteria: liquidity and volatility.
Liquidity refers to the average daily volume, compared with other vehicles in its group. The higher it is, the easier it'll be for you to get in and out of your trades. You may build a profitable position in an illiquid stock, only to lose at the exit due to especially bad slippage.
I learned this lesson decades ago, after building a 6,000-share position in a fairly inactive stock. When it began to sag, I decided to sell, and that's when I discovered that its average daily volume was only 9,000 shares. There were so few people trading it that my own sales began to depress its price. Taking several days to trade out of my 6,000-share lot felt like taking a fat cow through a very narrow gate and leaving large strips of its hide on gate posts. Now I focus on U.S. stocks that trade over a million shares a day. That's where I can slip in and out of my trades unnoticed and unmolested. With ...