Trading systems are best in markets that statistically predictable with high levels of liquidity and low costs.
Equity Markets
The equity market is arguably the most well-known among retail investors familiar with blue chip companies. While long-term prices are driven by institutional investors, short-term price action is ruled by automated trading as well as day traders.
Some of the most important factors you have to keep in mind include:
- Diversity – there are many different types of equities with very different characteristics, from stable blue chip stocks to volatile over the counter stocks. This yields a lot of opportunities for traders using strategies like statistical arbitrage.
- Commissions – commissions are relatively low for most large equities. However, they can chip way from your profitability over time. You should be aware of the effects of commissions, slippage, spreads, and other factors when building trading systems.
- Focus – many equity trading systems are focused on value-based parameters, such as those that identify undervalued securities compared to its past performance, peers, or the general market, as well as statistical arbitrage.
Forex Markets
The foreign exchange or forex market is the biggest and most liquid markets in the world. Between governments, banks, and institutional investors, trillions of dollars are traded on the forex market each day, which is a major draw for traders using trading systems.
There are several important factors that you always have to keep in mind.
- Liquidity – the forex market has far greater liquidity than any other major market due to the large transaction volume. This makes the market very attractive to traders since they can easily scale their trading systems to bigger dollar amounts.
- Costs – forex traders don’t have to pay a commission, in most of the cases. However, there are spreads that you have to consider. You should consider the spreads in various currency pairs and consider trading those with the tightest spreads in order to minimize costs.
- Limited Options – there are fewer currency pairs than there are equities, and this means that there may be fewer opportunities for you. Exotic currency pairs offer additional options, but they tend to be a lot riskier than other major and established pairs.
Futures Markets
Futures markets are popular among traders because of their high levels of liquidity and number of options. Additionally, futures markets allow higher levels of margin, or leverage, than many other markets, which opens the door to greater earning potential.
Here are some of the factors that you need to keep in mind.
- Costs – commission costs and spreads tend to be lower when it comes to future as compared with equities. This means greater profitability for traders who are developing trading systems.
- Options – there are more futures contracts than currency pairs, and this of course means more opportunities for traders, but equities are still the most diverse pool.
- Leverage – leverage can be used to magnify gains, but traders should keep in mind that it’s a double-edged sword that can also amplify gains.
Prices in the Forex market can move excessively rapidly, especially during the volatile periods. Before entering a trade, it is essential for you to know what you stand to gain or lose from it. Forex Profit Calculator is the simplest way to calculate profit or loss while trading forex.
