Nick McDonald: Finding markets that move

Typically the best markets to trade are those which have the most movement and preferably this movement is in one general direction, known in trading as a trend. Photo / Thinkstock

Many forex traders have been struggling recently with low volatility and declining volumes, in turn meaning many forex brokers who make their money from transactions are also feeling a drop in revenue. There are signs of this lack of movement changing in the last week but it is early days yet.

Of course, traders can sit around and complain about the lack of movement on forex or they can do what the best traders are doing right now - whether they trade forex or not - and get out and look for the best market of the day!

So, when new traders ask me "which is the best market to trade?" the answer is simple. There is no generic 'best', there is only what is best for you, the individual and this can and does change over time.

The answer is ultimately the same when it comes to all the other classic new trader questions such as, which trading style is most profitable, technical or fundamental? Which timeframe is best? Do day traders or swing traders make the most money? There is no generic 'best'.

When establishing which market 'you' should trade it is important to remember that there is no specific market where the most money gets made. Provided you are trading a market that is best suited to you personally then there is no reason why you can't be profitable in that market.

Here are four criteria that may assist you in assessing which market is best suited to you:

1. Liquidity

Liquidity, in the main sense we as traders are concerned, refers to an asset's ability to be brought/sold without causing a significant movement in the price and without therefore too much slippage (trading terminology for getting a worse price). For example within the stock market there are very liquid stocks such as Apple and at the other extreme very illiquid penny stocks and everything in between

When commencing your trading career you may sensibly choose to only trade small position sizes therefore liquidity is unlike to be an issue for you. However, as your trade size increases liquidity will start to have an effect, therefore it's often wise to plan ahead and master your craft on a market which you are unlikely to outgrow.

2. Volatility

Volatility is a measure of price variation of a market over time, for example a highly volatile market would exhibit larger swings in price than a low volatility market. Typically the best markets to trade are those which have the most movement and preferably this movement is in one general direction, known in trading as a trend. Attempting to trade markets which are flat with no volatility can be extremely difficult.

As of today stock markets are moving more than forex markets. This can change within days and weeks but the key is therefore not looking at only one market for opportunities, but at the best market for your trading style at any given time.

3. Capital required

A trader must ensure their available trading capital is sufficient enough to safely trade their market of choice. If you have $5,000 trading capital then actively day trading US stock markets with a minimum balance of $25k usually required by US brokers, is not going to be best for you. You might however be able to trade the same market via a CFD contract with a New Zealand based broker where the minimum balance rules do not apply.

Spot forex accounts allow people to trade very small amounts if they choose to and can often be a better option where lower stake trades are required. With many forex brokers these days, you can limit most of your losses to as little as $1 if you choose to by limiting position sizes and using stop losses. This is a great way to get experience in the markets with very low risk.

4. Exchange trading hours

Depending on your lifestyle demands there may be times of the day or night which are more conducive for you to trade. There is not much point trying to trade the US markets while you are asleep! In that case, stock traders might look to the Aussie or even UK stock markets, whatever suits their schedule. Forex is open 24 hours a day, 5 days a week and hence is a popular choice in New Zealand for this very reason.

Whether you are new to trading or have been trading for years, I encourage you to take the time to do the above assessment of the markets you currently trade or are thinking of trading. Finding the market that is best suited to you at any given time and constantly monitoring this and staying open to change, can really help traders towards better results.

Nick McDonald is a New Zealander teaching everyday people how to trade the worlds markets via his company Trade With Precision.