# How to determine liquidity

Since futures are contracts, the size of the contract is also known in advance. The contract size is fixed and is predetermined by the exchange.

For example, in the corn market, each futures contract represents 5000 bushels of corn. This is a pretty standard size for many of the grain markets. Wheat, oats and soybeans are also traded in 5000 bushel lots.

Cattle, Hogs and Pork Bellies are traded in 40,000 lb contracts, but Feeder Cattle are traded in 50,000 lb contracts. Heating Oil and Unleaded Gas are traded in 42,000 gallon contracts but a Crude Oil contracts are for 1000 barrels. Contract sizes can vary between markets so be sure to check with your broker for the particulars of the commodity you are interested in trading.

**Tick Size Does Matter**

Commodity prices rise or fall in minute increments loosely called “ticks”. Depending on the market, a tick might represent a price movement in cents or points. The easiest way to determine your profit/loss for your trade is to take the number of ticks the market moved during the day and multiply it by the price per tick.

To determine the tick value for any commodity begin by taking the contract size and dividing by 100 cents to get the

dollar value per cent. Then divide the result by 100 points to get the dollar value per point or tick. For example, the Swiss Franc market trades in 125,000 SF per contract. Therefore to get the dollar value per cent you would need to divide 125,000 by 100 cents (per dollar). Therefore, the value of a one cent move in the Swiss Franc is $1250.

Each cent in the Swiss Franc is also made up of 100 points per cent. So to arrive at the value per point, or tick, you need to divide $1250 by 100 points (per cent). This would give you a point value of $12.50.

Therefore, for each point the Swiss Franc moves in your favour, you have earned $12.50. If it manages to move a whole cent, or 100 points, you have made $1250. If it moves two cents: $2500, and so on.

This method of calculation works the same for all commodity contracts. Fortunately however, many charting software applications automatically display the point/tick value for you, making calculating profit and loss much easier.

1: 125,000 divided by 100 = 1250

2: 1250 divided by 100 = 12.50

For more from Erich, visit the Indicator Warehouse for additional futures resources and NinjaTrader Indicators.

Source: traderkingdom.com

Category: Bank

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