If you know the cost of slippage, you can do a much better job selecting the markets to trade and have a realistic appraisal of your trading expectations. The factors that make up slippage are volatility, overall market volume, current market activity, and the size of the order being placed. Of these items, current market activity is the most difficult to record, because it requires some estimation of volume as it accumulates throughout the day. While actual volume is not available for most markets, a reasonable approximation can be made using tick volume, the number of price changes during a fixed interval. In general, tick volume is directly proportional to actual trading volume; during periods of greater activity, both contract or share volume will increase along with the number of price changes. if you have carefully recorded the order price, execution price, volatility (daily high low), daily volume, time of day, and tick volume, you can find the importance of each factor and estimate the slippage for any trade.
The average daily range (not the true range) shows the maximum potential for a single day-trading profit. Some markets, such as gold and corn, combine a lack of liquidity with a narrow daily range and are easily disqualified from a day trade opportunity. Eurodollars have extremely high volume but very little movement; therefore, they are also not a good candidate for day trading. When volume is combined with volatility, the world index markets, followed by the currencies and long-term interest rates, are shown to he the best choices. Energy markets represent the next tier, grains remain active, and other markets have far lower volume.
Day traders may find that those markets with traditional daily trading limits present a problem during high-volatility periods. Day trading does best in markets that have wide swings not deterred by exchange limits; a single locked-limit move can generate a loss that offsets many profitable day trades. High volatility and locked-limit moves present a contradiction for day trading. Rules that provide for expanding limits have greatly helped reduce the frequency of locked-limit days; however, traders must always be on guard for this situation.