Help with trading systems for illiquid market

Discussions about the testing and simulation of mechanical trading systems using historical data and other methods. Trading Blox Customers should post Trading Blox specific questions in the Customer Support forum.
Post Reply
sagev
Senior Member
Senior Member
Posts: 31
Joined: Thu Mar 25, 2004 12:49 pm

Help with trading systems for illiquid market

Post by sagev » Mon Nov 01, 2004 1:25 pm

Hello there,

I have a question and can't find detailed reference on the web. I'd be pretty appreciated if anyone could give me a hand by answering the following questions: In your view, which type of systems are most suited for traders to trade in a illiquid market? Or, which aspect should be emphsized in contrusting a trading system which is aimed at a illiquid market?

Best regards, and thanks in advance.
cnyub.

Hiramhon
Roundtable Fellow
Roundtable Fellow
Posts: 98
Joined: Fri May 09, 2003 12:45 am

Post by Hiramhon » Mon Nov 01, 2004 1:49 pm

All markets are illiquid if you're trading large enough size. If your typical order is >25% of the daily trading volume, that market is extremely illiquid for you.

So the first thing to do is look at the distribution of daily trading volume. I'd suggest you look at the 30th percentile of the distribution, i.e. the volume V such that 30 of the past 100 days have a volume less than V, and 70 of the past 100 days have a volume greater than V. Compare that against your expected order size. Will you be pushing the market around? If so then it's illiquid.

I imagine the criteria below would be beneficial when trading an illiquid market
  1. Counter-trend method. Buys when prices are falling, sells when prices are rising.
  2. Average profit per share per trade is at least 1.0*ATR and, preferably, at least 1.0*MaximumDailyMove.
  3. Uses Limit orders to enter and exit
  4. Was backtested in Veritrader assuming 100% Slippage and still showed profitability
  5. Trades at non-popular times/prices (i.e. not during public frenzies such as at channel breakout points)
  6. Fewer trades with larger profit per trade, than in very deep liquid markets.

TC
Roundtable Knight
Roundtable Knight
Posts: 101
Joined: Thu Jul 08, 2004 2:12 pm
Location: Toronto, Canada

Post by TC » Tue Nov 02, 2004 9:08 am

Illiquid markets often appear attractive because of their seemingly exploitable and large price swings. They may also trend well.

However, tremendous care should be taken as it is often much easier to get into these markets than to get out !!

911s911rs
Contributing Member
Contributing Member
Posts: 5
Joined: Mon Dec 27, 2004 2:39 pm
Location: München

Post by 911s911rs » Fri Jan 07, 2005 5:58 pm

You might want to (re)read Reminiscences of a Stock Operator. Lots of commentary on getting out of unwieldy positions...

shakyamuni
Roundtable Knight
Roundtable Knight
Posts: 113
Joined: Wed Jun 04, 2003 9:44 am
Location: Somewhere, Hyperspace

Post by shakyamuni » Fri Jan 07, 2005 7:55 pm

All markets are illiquid if you're trading large enough size. If your typical order is >25% of the daily trading volume, that market is extremely illiquid for you.
:shock: 25% !

I’m hoping that I eventually have this problem in the S&P and TBond futures. :wink:
Last edited by shakyamuni on Sat Jan 08, 2005 4:48 pm, edited 1 time in total.

TC
Roundtable Knight
Roundtable Knight
Posts: 101
Joined: Thu Jul 08, 2004 2:12 pm
Location: Toronto, Canada

Post by TC » Sat Jan 08, 2005 12:51 pm

Liquidity is only an issue when YOU want to trade.

Unless you are in a hurry (never a good way to trade) Limit orders can ensure you get a reasonable fill in illiquid markets.

If want to get out, and choose NOT to join the stampede for the exits, then limit orders, even if executed over a period of time, can still get you the price you want. However, it takes some courage to sit through all the volatility.

Personally, if I found myself dumping positions in a hurry, and getting horrendous fills as a consequence, I would begin to question the validity of a strategy that put me into these positions in the first place.

To paraphrase the pilot's adage;

It is better to be out of the market wishing you were in, than to be in the market wishing you were out.

Tom

Post Reply