Am I correct in my assumption

Discussion in 'Trading' started by shark, Apr 3, 2010.

  1. shark


    That smaller and less liquid securities have more inefficiencies that can be exploited, as compared to very liquid ones?

    So for example a stock with a 100M market cap would be easier to profit from compared to something like EUR-USD.

    This, I think, is because the more liquid massive securities are more largely traded by investment banks and funds, while small market-cap stocks are largely traded by retail traders/investors.

    This leads me to the conclusion of why should I try to compete with some huge quant fund when I can instead compete with random idiots? :D
  2. shark


    Yep you're right. But the most effective way to master the more difficult instruments is to first master the easier ones.
  3. Nope.
    The intricacies of a difficult instrument are unrelated to the intricacies of a "simple" instrument. Each instrument has it's own difficulty and mastering one does not enable you to master another unless you are applying one system across every market. And in a case like that, the instrument is not relevant, only the system is.

  4. shark


    I'm thinking that the systems would be similar enough. I suppose it's also a matter of settling somewhere and finally making some money, instead of pursuing a phd in economics or something. heh.
  5. That's what I thought after I developed a system that worked fantastically on every market I applied it to. So then I tried it on CL, and it was useless.

  6. Two problems:
    1) Why do you think that the people at these banks and funds have not gone through exactly the same thought process as you have? I'd guess they probably arrived at the same conclusion...
    2) The less liquid a security, the more bid/offer you're likely to pay. Therefore, on balance and broadly speaking, if you include bid/offer, there's as much exploitable opportunity in less liquid instruments as there is in more liquid ones.
  7. You will not be competing with "random idiots." Rather, you will be competing for them with the not-so-random players.
  8. nLepwa


    You made several assumptions.
    At least one is wrong: you assume the less efficient the market the better.

    It is exactly the opposite. The most efficient market is the easiest to trade because it is the most predictable.
  9. You should have found the answer yourself before asking.

    (1) Less liquid: more inefficiencies but more difficult or too constly to get out of a position

    (2) More liquid: less inefficiencies but easy to get out and with tight speads.

    Traders must choose (2). Not being able to get out of a position or paying a lotfor it cancels the very idea of being a trader.

    It is so simple...
  10. Since 80 or 90% of the battle is competing internally (with ourselves) as opposed to externally it becomes much more about not being the random idiot than looking for one to compete with.

    If by trading you mean intraday than you need to be in VERY liquid instruments. If you are using longer time frames and understand what it means to manage your leverage in ways that are sensible, then you can deal with less liquid.

    But, unless you are a pro with a special insight or feel, leave Random Length Lumber and Rough Rice for others. Less liquid is one thing ... illiquid is something to be avoided.

    #10     Apr 4, 2010