In the futures markets, there is no assurance that a liquid market may exist for offsetting a commodity contract at all times. Some future contracts and specific delivery months tend to have increasingly more trading activity and have higher liquidity than others. The most useful indicators of liquidity for these contracts are the trading volume and open interest. There is also dark liquidity, referring to transactions that occur off-exchange and are therefore not visible to investors until after the transaction is complete. It does not contribute to public price discovery
The most liquid futures contracts and markets are those with which, and within which, you can enter and exit a trade almost immediately. Some of the main advantages of trading in highly liquid futures markets are: - Exceptionally rapid fills of your entry and exit orders
- Extremely advantageous entry and exit price points
The main benefit of course is extracting optimum profit potential should the trade move in your favor. In these highly liquid futures markets, there are a very large number contracts being continuously traded, providing willing buyers and sellers to enter into a trade with your desired long or short position.
What is Liquidity?
There are a couple of related definitions. Overall, a high level of trading and "open interest" characterizes liquidity. It is basically your ability to take an asset and quickly converting it into cash...or in our case, buying or selling specific commodity futures (or options) contract in the market, with little to no effect on your desired contract entry or exit price. High liquidity allows for little to no effect on the desired entry price point into, or desired exit price point from a futures contract and market. Whereas a commodity affected by low liquidity or trading activity can mean slow order fills and/or less desirable order entry and exit price points.
Some of the other most recognizable and most liquid futures contracts and markets include: - S&P 500
- Treasury Bonds
Other highly liquid commodity markets are:
- Crude Oil
The Financial commodities and futures markets deal with the ultimate commodity - money. And because financial markets are central to everything that goes on around the world, it's no surprise that these commodities are among the most liquid futures contracts, and are among the most heavily traded markets.
The Most Liquid Market
The single most liquid futures market in the world is the FOREX - Foreign Exchange - or more precisely, the Foreign Exchange Currency market. More business is transacted daily in FOREX than in all other worldwide financial markets combined. Billions, Trillions of dollars’ worth. It's just mammoth. And it keeps increasing.
It truly gives you the opportunity to trade the most liquid futures contracts on the planet. With that sort of futures market liquidity, and with effective, around the clock 24 hour trading, executing a FOREX buy or sell order is almost instantaneous, if not so.
The volume of each futures contract (where individual contracts specify standard delivery months) is widely reported along with the total volume of the market, or the aggregate volume of all individual contracts. These volume figures are reported one day after the trading day in question, but estimates are regularly posted throughout the current trading day. For certain contracts, such estimates may be posted as regularly as hourly.
Volume and Liquidity
The most basic use of volume on futures markets is to analyze it in relation to liquidity. Futures traders will receive the best execution fills where there is the greatest liquidity, which occurs in the delivery month that is most active by volume. Yet, as contracts move from second month out, traders move their positions to the closest delivery month, causing a natural increase in volume. By contrast, volume declines as the delivery date gets...
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