“Market Conditions and Risk control“
> Explanatory Article by Marios Kyriakou, MSc Economics
About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.
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<Last updated 26.04.2020>
Hi! If you are interested in online trading you should think carefully before you trade and take into consideration the below article where I explain the importance of understanding market conditions and how to control risk.
Important to consider when trading CFDs:
How much leverage to use? How much am I expecting to profit? Do I have enough funds?
In forex, high leverage can multiply any profits but it can also put your entire balance at stake. Risk management is therefore critical, and as a trader, you need to ensure that you are familiar with the risks involved in trading leveraged products such as Forex and CFDs.
With leverage 1:400 the margin needed is only 250 for 1 lot (100,000 units). The exposure in the market is huge relative to the funds needed for entering.
> Each pip has value 10 USD. This is important to know as it allows us to understand if the price moved significantly or not when counting in pips.
Calculations and Expectations
MT4 Points vs PIPs: The price has 5 decimal places after 0, 10 points is 1 pip. PnL based on PIPs: The price difference multiplied by quantity gives the profit/loss.
If the market moves 1000 points/100 pips, the Profit/Loss = 1,000 USD.
Market moving 100 pips is common during the day. Use leverage with caution.
London Session and Trends
Starts 8:00 am (GMT+1) The London forex market session sees the most forex volume of all the forex market sessions.
>Market is Volatile
Starts 8:00 am (GMT+1)
Expected Price moves
30-60 PIPs? EURUSD 1 Lot PnL = 300 – 600 USD
Timing and Probability
Consider a situation in which trading is:
> Same Lot amount per trade
> Random choice for going long or short at any point in time.
> Profit per trade = Losses per trade
Then Exp PnL = (Profit x Prob Profit) + (Loss x Prob of Loss)
Example with no trading costs: => (10 x 0.5) + (-10 x 0.5) = 0
It is obvious that since the expected profitability of every trade =0, our goal is to increase the Exp. PnL per trade.
Either we increase the probability of having more profitable trades, or we find a way to have more profits than loses on every trade, or better both.
Increase Profit vs Loss per trade
> Example with more profit => (20 x 0.5) + (-10 x 0.5) = 5
Increase Prob. of Profit vs Loss
> Example with higher Prob. of Profit => ( 10 x 0.7) + (-10 x 0.3) = 4
Timing and Distance
When opening a trade we have to think about both cases. Here we place the SL
Close to the entry while TP is further. We expect a reversal and thus the probability of a win trade is more expected.
> Trade at a specific time (the trend is your friend)
> Fundamentals into consideration
> Technical Analysis (Calculating price move distances from Entry)
Trading Costs and Strategy Risks
For opening a CFD position there are trading costs to consider. Among others, depending on the broker, are the following:
>Spread Charge (i.e. 1.6 pips)
>Rollover (Swap Charge/Earn)
Net PnL: Price Distance – Trans. Costs
(The distance between the open and closing price determines the trade PnL only)
You should be careful when you watch the price updates. The MT4 platform, for example, shows the BID price by default.
This means that on every chart that shows historical data of prices, only the BID price is recorded and not the ASK price.
BID, ASK and Spread Risk
By looking at the chart as it is, it is not possible to see clearly if there was a spread widening since the ASK price is not visible.
> In this example of a rollover, the BID price is indicated by blue color and the ASK by red color.
–BID price moves create the Candlesticks. Mid Price: (ASK+BID)/2
News Announcements and Volatility Risk
Spread Widening and risk of Stop Out / Volatile Market Conditions at specific times
Some technology providers or even the brokers themselves are recording the spread and provide this information. As per below, you can see that during important news announcements such as the NFP report, the market experiences huge spreads. Another case of volatile market conditions is when the rollover takes place.
When the market is volatile there are many risks involved.
–Prices move rapidly and deviate too far
> Risk of Stop Loss hit or
> Stop out
Rapid Price Moves – Candlestick Interpretation
Consider a possible case: Prices move in multiple directions before finally ends up downwards during this minute as per below. To be precise on price moves we should actually be talking about price updates. Prices do not move, however, there are price updates taking place that in a few seconds can be sometimes low and sometimes pretty high depending on the transactions taking place when a shock takes place. This short-term shocks are likely to happen during news. In addition, you have two prices, BID and ASK while the BID updates lower the ASK might update a lot higher, thus having a sudden spread increase.
“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.
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