<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.
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
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