Spread, liquidity and picking one product
Lesson 11 · about 8 min
The previous two lessons compared groups of instruments. This one gives you the hard filters to apply to any single instrument, extends the comparison to forex and crypto, and then makes the argument that every experienced day trader eventually makes: pick one product and stay in it.
The spread filter
Spread is the cost you pay on every trade whether or not the trade works, so it should be measured against what a trade can make. The useful ratio is spread divided by the typical stop distance.
Spread-to-stop ratio = spread ÷ stop distance
| Instrument | Spread | Normal stop | Spread-to-stop |
|---|---|---|---|
| ES / MES | 0.25 pt | 8 pt | 3% |
| Large cap at $150 | $0.01 | $0.50 | 2% |
| Index ETF | $0.01 | $0.40 | 2.5% |
| EUR/USD | 0.8 pip | 10 pips | 8% |
| Small cap at $4 | $0.03 | $0.20 | 15% |
| BTC perp | $2 on $60,000 | $300 | 0.7% (plus 0.1% in fees) |
| Illiquid alt-coin | 0.3% | 1.5% | 20% |
The rule: under 5% is clean, 5% to 10% is tolerable with wider targets, above 10% do not day trade it. The ratio is the reason small caps and thin alt-coins are structurally hard, and why EUR/USD traders need targets of 2R or more to make the maths work.
For forex, note that spread also widens at the session hand-offs (around 17:00 ET) and during news, sometimes to five or ten times normal. A stop resting in that window can be hit by the spread alone.
The liquidity filter
Liquidity is whether you can get in and out at the price you see. Three quick tests:
- Volume. For stocks, at least 1 million shares a day, and for a catalyst name at least 200,000 pre-market. For futures, the front month of a major index. For crypto, the top five coins by volume on a major exchange.
- Depth. Your full size should be less than about a tenth of what is displayed on the inside bid and ask most of the time. If you plan to trade 1,000 shares and the inside quote shows 300, you will move the price on every exit.
- Behaviour at your exit. Watch the book at 9:31 and at 12:00. If the spread jumps to three times its normal width at the times you would need to exit, the instrument is thinner than its daily volume suggests.
Forex and crypto in the comparison
Forex majors (EUR/USD, GBP/USD, USD/JPY) pass the liquidity test easily and the spread test with a note: the 8% ratio means average targets need to be larger in R than for index futures. The advantages are a tiny minimum size (a micro lot risks about $1 on a 10-pip stop) and a window that suits non-US time zones. The disadvantages are no central volume data, which makes the Module 5 volume tools weaker, and a dealer-driven market where your broker may be the counterparty.
Crypto majors (BTC, ETH perpetuals) pass both filters on the largest exchanges. Fees, not spread, are the main cost: taker fees of 0.02% to 0.05% per side add 0.04% to 0.10% per round trip, which on a 0.5% stop is 8% to 20% of risk. Use limit orders where the setup allows and prefer exchanges with maker rebates. Anything outside the top handful of coins fails the liquidity test for intraday.
Why one product
The argument for concentration is not stylistic. It is three separate things.
1. The sample gets built faster. One hundred trades in one instrument is a sample. One hundred trades spread over twelve instruments is twelve samples of eight, none of which tells you anything.
2. Behaviour is instrument-specific. How far ES overshoots the opening range before a failed breakout is different from how far a large-cap tech stock does. VWAP holds differently. The 10:00 reaction differs. A trader who watches one thing for months learns these constants; a trader who rotates never does.
3. Attention is the scarce resource at 9:35. The open moves fast. A trader watching three instruments will enter the second-best one because it triggered first, and manage the position poorly because the third is doing something.
The research from Module 1 fits: the profitable minority in Brazil traded a single contract, and the Taiwan study's persistent losers were disproportionately the most diversified and most active.
Key idea: A day trader's edge lives in the details of one product's behaviour. Concentration is how those details get learned; diversification is how they get missed.
Choosing yours
| If you have | And your window is | Trade |
|---|---|---|
| $8,000 to $50,000, US or European hours | 9:30 to 11:00 ET | MES |
| $25,000 or more, US hours, a stock account | 9:30 to 11:00 ET | One index ETF or one mega-cap |
| Under $8,000 | 8:00 to 11:00 ET or the London open | EUR/USD micro lots |
| Any size, non-US hours, no futures access | 9:30 to 11:00 ET or 00:00 UTC | BTC perpetual, small size |
| A funded prop account | Firm's allowed hours | The firm's most liquid contract, usually MES or ES |
Note what is not in the table: small caps, alt-coins, exotic forex pairs, single-stock options. All of them can be traded by someone; none of them is the first product.
Try it: Compute spread-to-stop for the instrument you are currently trading, using the actual spread at 9:35 and your average stop from your log. If it is above 10%, that number alone explains a good share of your results.
Recap
- Spread-to-stop ratio: under 5% is clean, above 10% is not day-tradeable.
- Liquidity tests: daily volume, displayed depth versus your size, and spread behaviour at your exit times.
- Forex majors have a higher spread ratio and need larger targets; crypto's main cost is fees, so use limit orders where possible.
- One product builds a sample faster, teaches instrument-specific constants and protects attention at the open.
- Match product to account size and available window; small caps and alt-coins are not a first product.
See it drawn
Original diagrams for the ideas on this page. Illustrative, not real market data.