“Market 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>

Dear reader,

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.

Trading short term has its advantages. First of all, you are not exposed to the market for long. Having open positions for long means that there is higher probability for your capital to be affected when something important happens. You want only to trade during normal market conditions, when liquidity is higher and trading costs (such as spread) lower. Slippage is less probable to occur. You want to have control when you trade, knowing when you are exposed to higher risk.

We must be careful and the below shows why:

 

Consider the Trading Costs and Strategy Risks.

Spread Charge (i.e. 1.6 pips), Commission Charge, Rollover (Swap Charge/Earn)

Net PnL: Price Distance – Trans. Costs

This is a case where the spread is taken into account when placing the trade. Expected distance on when the BID price will stop matters when going long.

News Announcements and Volatility Risk

Spread Increase (Trading cost)

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.

 

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.

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. By looking 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 the below example of rollover taking place, 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

 


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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