Hi, mates The person that taught me how to invest in stocks advised me to watch for avg volume to be at least 400x your position to avoid having problems when you need to get out of a position. I do an average for last week, 1mo, 2mo and 3mo Avg volume and multiply by stock actual price and it has to be 400x the mkt value of my position. What are your thoughts on this metric?
I mostly take positions in small market cap, low volume common and preferred shares. As long as my holding period is 6 months or more, I would never look at that. I would also not be concerned if my position sizing is very small. If I'm going to buy 5000 shares or less, I do not care about those metrics.
Did that person also explain to you why you would be looking for that 400x multiplier? What problems was (s)he referring to?
Unfortunately, no. The problem he was aiming to solve is to not being able to get out of a position due to lack of volume.
IMO unless your position is something like 5%, or more than, the average daily (20) volume you shouldn't concern yourself with it. If you are trading penny stocks - good luck with that, no matter what your size or overall average traded volume. Crap shoot.
An old "rule of thumb" is "2% of the handle". That seems large to me, as it makes you 1/50th of the normal daily volume.... but I've seen big players take 10%.
So, If Im understanding correctly... 50x is the rule of thumb and 10x is what you have seen big players do, right? Can you set alarms for the volume of every stock in your portfolio?
I assume you are trading microcap stocks. Unless someone is an expert in penny stocks and has quantitative understanding of volume risk for these illiquid stocks, I'd take comment lightly.
That could be one reason: not being able to close a position due to lack of demand in the market. Some others use a similar rule if they want to avoid that their order (either buy or sell) would be that large that it would influence the market price. What ratio to use is a more personal choice: do you want to buy/sell less that 1/50th of daily volume, or 1/100th, or 1/400th? Different people have a different opinion about when their order would start to influence the market.