The financial markets bring together a wide array of financial instruments that traders can take advantage of. However, with so many instruments to choose from, it can be difficult to know where to begin.
In this article, we’ll look at the most traded instruments and why people choose them over others. Let’s start by considering the basic characteristics that most traders look for when selecting an instrument.
Traders prefer instruments with high levels of liquidity as they are easy to sell or buy at any given time. This ensures trading efficiency and price fairness.
High volatility tends to benefit traders who know what they are doing but small mistakes during periods of high volatility can lead to substantial losses. Traders tend to choose instruments that minimise exposure to extreme volatility while allowing them to take advantage of short-term price movements.
Without leverage, traders who trade actively and frequently would have to hold large amounts of capital all the time. Traders tend to prefer highly-leveraged instruments that allow them to trade with a low capital investment.
Most traders opt for financial instruments with low transaction costs, allowing them to get optimum returns.
Profitable trading depends to a large extent on the availability and free flow of information necessary to make sound financial decisions. Markets move on news but not all trading platforms and brokers provide quick access to associated news on all instruments. Traders prefer to trade instruments whose information and news is readily available.
1. Forex Instruments
The forex exchange market runs 24/5 and it offers what traders look for in a preferred instrument: large liquidity, high volatility, low transactional costs, and low capital requirements. Forex instruments also tend to provide high leverage and their information is readily available and updated regularly.
The commonly traded forex instruments include currency pairs of the world’s biggest economies: EUR/USD, GBP/USD, AUD/USD, USD/JPY, and USD/CHF.
Insight: It’s prudent to avoid exotic currency pairs as they lack the much-needed liquidity. Brokers also tend to charge large transactional costs on such currency pairs, making it hard to get optimum returns on small price movements.
Futures are popular because they mitigate risk and unpredictability. They allow a buyer to buy or sell an instrument on a specified future date at a specific price. Traders commonly choose:
Index Futures:Futures on popular indices like the S&P 500 and the FTSE 100 are some of the most liquid and high-volume trading instruments available. Index futures are less volatile than other instruments but they are still common due to their high liquidity and low transaction costs.
3. Index-based ETFs
Exchange-traded funds (ETFs) are increasingly becoming popular among traders because they offer high liquidity and low costs of trading. The most common ETFs are on common commodities like gold and indexes like the S&P 500.
4. Cryptocurrencies CFDs
Contracts for difference (CFDs) have experienced a dramatic rise in popularity. Similar to indices, CFDs have no physical value. They allow traders to trade the price movements of instruments including cryptocurrencies. Traders choose them because they offer high volatility and they are leveraged.
These financial instruments are common but no financial instrument should be traded unless you have sound knowledge of its characteristics. Picking an instrument just because it’s widely traded is a sure way to lose money in the financial markets.
Which instruments do you trade the most? Join the conversation and share your experience and insight.
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