EDIT: This post was meant to be in a different thread.
As a general rule, I have found that the $3 a share cutoff was arbitrary.
Why do we need a liquidity filter?
- Data errors. For example, if the open price is mistakenly listed as 0.00 (a placeholder for NA) then the return can be quite high. Misleading.
- To minimize the bid/ask bounce. For example if the bid is 0.01 and the ask is 0.03, you can register a fake 200% return just from the bid/ask bounce.
- Liquidity constraints on real life buying. You can’t buy $1 million worth of a nano cap at the open price.
I usually have the following rules to minimize the data errors:
MktCap > 25
Price > 0.1
You can see some of the pricing errors with this public screen. Raise the minimums until the pricing errors disappear.