“Understanding Market Conditions

 > 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.

Understanding the market conditions during the period you are trading, or intent to trade is crucial. When trading online you have to be able to understand the risk involved and prepare a plan that will meet your expectations. The question is. Are your expectations realistic?

When trading CFDs it is very important to ask yourself questions such as the below:

  1. How much leverage to use?
  2. How much am I expecting to profit?
  3. Do I have enough funds?

Leverage amplifies profits but also losses. Expectation forming implies that you have a plan in place. Having enough funds, adequate funds means that you took into account the fact that you will suffer also losses not only winnings. Any investment and trading activity involves risk and in the world of investments, investors experience both losses and profits and if you are not prepared for that then better not to continue with online trading.

 

When to trade?

Which Trading Session? Which Day? Trade during “normal” market conditions? Take both fundamental and technical analysis into consideration?

Many people have trading strategies involving small trades, short term trading during the London session. Why? Because of three important reasons:

a) Because the London session crosses with the two other major trading sessions–and with London being such a key financial center–a large chunk of forex transactions take place during this time. This leads to high liquidity and potentially lower transaction costs, i.e., lower pip spreads.

b) the most volatile session, we need prices to move (transactions move the prices). Most trends begin during the London session. Without trends there are no opportunities to make profit.

Example trading 1 lot:

Why referring to this? because during the European session the market moves on average 30-60 pips when the European Session starts and using number of PIPs move is a convenient quick measure of our potential profits/losses. 30 pips move means 300 USD, if we trade 1 lot, EURUSD.

Trading the London session:

Starts 8:00 am (GMT+1) London Time.

Market is Volatile, Possible Trends >> Trading Opportunities

It is more clear below to see that prices move within a small range from midnight until the morning hours, below shows 10:15 GMT+2 (8:15 UK time -GMT+1). To see some action we have to wait until then. Morning news announcements also take place within the day and people form expectations before these announcements, thus moving the markets.

 

 

More examples of London session and trends forming:

-Expected Price Moves after 9:00 am(GMT+3)?

-30-60 PIPs? EURUSD 1 Lot PnL = 300 – 600 USD

 

 

It is important to take all the trading costs into consideration such as the spread and commission (if applied). When speculating the distance between the opening price and the potential closing price, the profit generated must of course surpass all costs associated with that trade. If the market is trading in a relatively small range, it would be very difficult to be profitable in such market conditions and have consistency.

At this point, we can show an example of a simple expectations formation using probability:

What is the expected PnL per trade? Consider a situation in which trading is:

> Random choice for going long or short (2 choices) at any point in time (no other information assumption)
> Same Lot amount per trade (keeping factors fixed)
> Profit per trade = Losses per trade (no spread/trading costs assumption + closing the trade at equal distance at every single 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

In other words… timing and probability matter! Your goal is to increase the Exp PnL per trade.

Know what you are doing. Focus on:

> Increase Profit vs Loss per trade
> Increase Prob of Profit vs Loss

Example with more profit than loss => (20 x 0.5) + (-10 x 0.5) = 5 per trade.

Example with higher Prob of Profit => ( 10 x 0.7) + (-10 x 0.3) = 4 per trade.

 

How to change Prob of Profit & Profit Amount per trade:

> Trade at specific time (trend is your friend)
> Fundamentals into consideration
> Technical Analysis (Calculating Price move distances from Entry)

Here, the profits (if is a winning trade) will be more than the loss (if is a losing trade). Is probability of winning in favor? Yes there is a trend reversal likely to happen due to resistance. Taking the market conditions in to consideration is vital. If at that time news reports took place, it will cause uncertainty and volatility causing your strategy to fail.


 

“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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