Traders, Choose Your Markets Wisely

Everybody who becomes interested in the financial markets inevitably wants to find out how to decide which ones to trade or invest in. Every market has many criteria that can be examined. Analyzing all of these criteria can quickly become time-consuming and might discourage some would-be traders or investors. What if there were only a handful of market parameters that mattered? Analyzing these parameters would allow one to come to a conclusion as to whether or not to trade a particular market. If data representing these parameters is easily accessible for the markets in question, analyzing and comparing markets is quickly and easily accomplished.

There are two premises to consider. The first is that market prices will change. This really can’t be argued with. Sooner or later, the bid and ask (or offer) prices will change. Sometimes, relative to the current prices one may be watching, the markets move extremely fast and significant changes can be made in a fraction of a second. At other times, prices won’t fluctuate much at all for a number of hours, or even days, in a row. The second premise is that one does want market prices to change in a certain direction. If prices don’t change, a trader can’t profit. That same trader won’t lose money if prices don’t change, but then what’s the point of trading? In trader jargon, if someone is going “long,” the higher the prices go, the more profit is made. Conversely, if someone is going “short,” the lower prices go, the more profit is made. At what point a trader would close a position to take profit is a matter of preference. After gaining an understanding of these concepts, one just has to learn how to judge a market by four simple parameters:

1) Margin requirements
2) Tick value
3) Spread
4) Price action

Margin requirements tell you how much money you need to have in your account to open a position of a certain size. They will vary depending on the instrument traded. A trader can determine what the possible sizing options are in terms of trading volume by knowing the margin requirements. Lower margin requirements are often preferred due to the fact that higher volume positions can be opened, which in turn can have a more dramatic effect on profits. The flip side is that higher volume (relative to one’s account) can also bring higher drawdown.

A tick represents the smallest increment that the prices in any given market can change by. Every time market prices change, they change by one or more ticks. The number of ticks that the prices have changed, multiplied by both the tick value and the number of lots/contracts a position has, determines the value of a position.

The spread is the difference between the Bid and the Ask/Offer prices. In many futures markets, the Bid and Ask prices are right next to each other. In other words, they differ by one tick. Many forex brokers will quote Bid and Ask prices that vary by a number of pips or points. The spread has to be “overcome” in this case before profits are seen.

Lastly, price action is the way that prices move or change in any given market. By looking at a chart, a trader can tell how much movement is typical for any instrument and how that market typically trends or falls into consolidation. This is significant when deciding on what strategies to utilize when trading that particular market.

Altogether, these four parameters can provide a trader with enough information to decide whether or not a particular market is worthwhile to trade. It is only by knowing the values of these parameters that one can perform the necessary calculations to develop a specific strategy for a potentially tradable market.

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