Way of the turtle

214
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Way of the Turtle

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the $5 million account for a single trade. No other trade from the
Turtle era came close to being as big as this trade that we missed.
Does this mean that one should trade all markets? Are there no
good reasons to exclude particular markets from trading? The primary
reason for not trading a particular market is liquidity. Markets that do
not have active trading and sufficient volume can be much harder to
trade. The more successful you become, the more this becomes a lim-
iting factor. It was the reason Rich kept us out of the coffee trade.
When you combined our trading sizes with Rich’s, we were trading
thousands of contracts in coffee when we entered and exited. That
was certainly at the edge of viable volume limits. Therefore, Rich’s
decision was a very rational one, though one I wished he had not
made before the coffee trade discussed above materialized.
Bulletproof Systems
•
215
Jan 1986
Dec 1985
Nov 1985
Oct 1985
Sep 1985
120
140
160
180
200
220
240
260
280
KC: Coffee-CSCE
Enter Long
1985-10-10 Day
Exit 65 bars
1986-01-16 Open
Entry
141.91
Exit
234.37
Initial Stop
139.16
Figure 13-1
The Coffee Trade We Missed
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You may be thinking that you can trade an illiquid market if you
have a small account size. This may be true depending on the type
of system you are using, but it may be wrong. The problem with
illiquid markets is not that you cannot get in and out most of the
time. The problem is that in certain circumstances you can have
many orders and no traders to take the other side. Illiquid markets
mean few buyers and sellers. So your single contract buy order
may be sitting in a pack of 200 to 500 contracts to buy when there
are no sellers at all. This does not happen as often in more liquid
markets.
Illiquid markets are also more susceptible to price shocks. Take
at look at the charts for rough rice, lumber, propane, and any mar-
ket that trades less than a few thousand shares a day and compare
the number of large one-day moves with that in more liquid mar-
kets. You will find that there are many more days with large unex-
pected price moves in the illiquid markets.