Many people have the erroneous idea that liquidity equals high volume or large Open Interest. I don't disagree with this idea, but I believe that good liquidity also requires a second component -- tight spreads. When I chose which futures instruments I will trade, I look for two things:
- One of my mentors taught me not to trade any futures instrument that has Open Interest less than 10,000. However, over time, I decided to tighten my restrictions even more. I won't trade any futures instrument with Open Interest less than 100,000. This requirement creates a fair short list of trading instruments for me.
- I also add a second criteria. I won't trade any futures vehicle with a spread of more than 1-2 ticks. During the day session, I won't trade any futures instrument with a spread more than 1 tick, but during evening trading, I won't consider anything with a spread of more than 2 ticks. I believe that any else is financial suicide. Fortunately, trading with the CME and CBOT, there are a fair sizable number of futures than have spreads of just one or two ticks. I will consider trading futures on a longer-term basis that have tight spreads but relatively low volatility, including some of the "other futures" that I mentioned in one of my earlier posts today.
