Choosing Markets and Instruments for Intraday Trading

What you will learn

• Four criteria for judging whether an instrument suits intraday trading.
• How to calculate the spread-to-range ratio.
• Why contract size (granularity) decides whether you can follow your risk rule.
• How to see the hidden leverage behind a small intraday position.

Explanation

The main markets (stocks, forex, crypto) were compared in general in the course "Trading". For day trading, the question is narrower: can this instrument give me moves that are large compared with my costs, in units small enough for my risk budget, at times I can trade?

Criterion 1: liquidity

Liquidity is the ability to buy or sell quickly without moving the price much. For day trading you want a narrow spread and enough orders in the order book during your trading hours. Large shares in the DAX (Germany's main index of 40 companies), major index futures and major currency pairs are usually liquid during their main sessions. Small shares can have wide spreads and sudden gaps in the order book.

Criterion 2: spread-to-range ratio

The spread-to-range ratio compares the cost of crossing the spread with the typical move you want to capture:

Spread-to-range ratio = spread ÷ average range of the bar size you trade

If you trade 15-minute moves, use the average 15-minute range (high minus low), measured on your own chart data. A practical rule of thumb: below about 10% is comfortable, 10–20% is usable with care, and above about 20% costs take too large a share of each move. This is a planning guide, not a law.

Criterion 3: granularity

Granularity means how finely you can adjust your position size. Futures are standardised contracts traded on an exchange. On Eurex, the DAX future is worth €25 per index point, the Mini-DAX future €5 per point and the Micro-DAX future €1 per point. If one contract already risks more than your budget, you cannot trade that contract correctly, however good the setup. CFDs and shares can usually be sized in smaller steps.

Criterion 4: hours and behaviour

Xetra, the main electronic trading venue of the Frankfurt Stock Exchange, trades shares in continuous trading from 9:00 to 17:30 German time. DAX futures trade for much longer on Eurex, and crypto trades 24 hours a day, every day. Long hours are not automatically an advantage: liquidity is thin at night, and you cannot watch the screen all day. Choose an instrument whose most active hours match your available hours. Check current trading hours on the venue's own website.

Leverage: notional exposure

The notional value is the full market value your position controls: price × point value × number of contracts. Intraday stops are small, so a modest euro risk can hide a very large notional position. With CFDs, the EU limits retail leverage by asset class (covered in the course "Risk Management"). Always compare the notional value with your account size.

Worked example

Hypothetical example: Ben has a €10,000 account and a risk budget of €100 per trade. His intraday setups on an index need a 20-point stop. The hypothetical index level is 20,000 points. Fees, financing costs and taxes are excluded.

Step 1: spread-to-range ratio for three hypothetical instruments.

The small-cap share fails the cost test. The index CFD and the large-cap share pass.

Step 2: granularity in index futures. Risk per contract = stop × point value.

• DAX future: 20 × €25 = €500 per contract. That is five times the budget, so it cannot be traded.
• Mini-DAX future: 20 × €5 = €100. Exactly 1 contract fits.
• Micro-DAX future: 20 × €1 = €20. €100 ÷ €20 = 5 contracts.

Step 3: notional exposure. 5 Micro-DAX contracts × 20,000 points × €1 = €100,000. This is 10 times Ben's €10,000 account. His planned loss is €100, but a fast move through his stop could cost more.

Common mistake

Practice activity

On paper: your risk budget is €60 and your setup needs a 15-point stop on a hypothetical index at 18,000 points. (a) Which of the three DAX futures sizes can you trade, and how many contracts? (b) What is the notional value? (c) A share has a €0.06 spread and an average 15-minute range of €0.20. Calculate its spread-to-range ratio and judge it.

Key takeaways

• Judge instruments by liquidity, spread-to-range ratio, granularity and active hours.
• Spread-to-range ratio = spread ÷ average range of your bar size; lower is better.
• If one contract risks more than your budget, that contract is not suitable for you.
• Check notional value: small intraday stops can hide high leverage.

Next step

In the next lesson, you will prepare for a session before the market opens: marking levels, checking news and writing a game plan.