Friday, February 17, 2012

Choice of trading instrument: Is thinner better?

A highly liquid instrument such as ES can form tiny bars and give weak moves. A thinner instrument such as TF (shown left) usually shows clearly formed bars and often results in strong moves. So what should a new trader trade?

An experienced and profitable trader can probably trade any instrument with some adjustments to his technique. Some momentum type trading also works better on thinner instruments.

For a new price action trader, the correct answer is the more liquid instrument. Why? For many reasons, but mainly because while the bars look great on a thinner instrument, the information they carry is unreliable.

Take b5 today. It was a doji on ES but It was a nice strong bull bar on TF. At first glance it may look like a 2 legged move to the ema or otherwise a sign of strength. The bar triggered and stopped out buyers. On the other hand b5 was a doji on ES and more important, it did not trigger. Shorts below b4 did not get their stops taken out. Pullbacks after entry are of acceptable size.

Stops on thinner instrument need to be larger and unless you are capable of consistently taking targets larger than your stop, you should avoid trading thin instruments.

A new trader should not focus on making money but on doing the right thing and trading correctly. Once your percentage of wins is high, you can simply trade larger size to make the same amount of money that a thinner instrument would provide.

Once your size increases, (a good problem to have) you may not be able to trade thin instruments without significant slippage. That said, a thinner instrument with a small tick size such as NQ is often a good choice for new traders.


  1. Really good post. Could you do your analysis on the ES and place the trade through NQ reducing my risk?

    Also todays price action, from what you've taught on this blog bar 4 seems to have a lot of overlap and looks like a small trading range. What made you take the trade?

    And i took the trade at bar 12, but i tighter my stop and the pullback took me out. Did you tighten your stop and if you did where too?

    1. No.

      Its Ok to pass up any trade that makes you uncomfortable.


  2. Sorry Cad, another question. Both today and yesterday bar 3 has been a strong reversal bar, todays especially looks good. However both would have been losing trades. How do you avoid these trades? Where there any signs they were likely to fail?

    1. b3 is an entry bar, not a signal bar.

    2. I don't understand your response? you would have been filled.

    3. b3 is the first attempt to reverse what's still a trading range. It would be forcing you to buy at the top of a trading range. Not many will enter, leading to a failure, leading to two more legs down.

      You should not take reversals on the first attempt except in rare circumstances. Best is to only consider one at ema or after two failed attempts in the original direction.

    4. Cad,
      Do we treat the A2 differently if it is on the opposite side of MA. For example, H2 entry with a strong bull signal bar below the MA.

  3. Omar-
    my two cents--
    On question 1: b2 is a reversal bar (signal) although it is red. Cad advises not taking signal bars unless they are green (in this case).
    question 2: b4 trapped the bulls who went long above b3. It was a RB and a BOPB short. likewise b2 trapped b1 shorts.

    humbly submitted, JimJ

    1. Yeah i understand the trade now at 4 now. However what would have prevented you from going long 1 tick above bar 3, its looks like a very good 1Rev trade?

  4. I feel your pain. I think the answer is that in the first few bars one must give b1/b2 respect as a TR. So in effect buying above b3 is buying at top of TR.
    Cad and Al both talk about taking every early reversal and at my level of skill this is one way of making sure I get the OR. The price you pay for the b4-b21 run is to take the b4 and then reverse on b4.
    but the real answer is Cad's: the reversal bar is b2. it allows you to buy somewhat lower in b1's TR, trapped bears who shorted b1.

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  6. Hi Cad,
    Great site you have here, easily the best stuff on trading I have ever read, and I read a lot:-)!