How to Find Your Edge Using Market Characteristics

Intimately understanding a market and its characteristics can be an integral part of finding an edge and keeping it. When you know a financial market well, you tend to understand more of its movements, know when you will see spikes of opportunity and even have far greater potential to map out a trading plan that fits the characteristics of the market. 

There are several ways you can work to demystify an instrument’s market characteristics, and just like a psychological profiler would determine everything about a person, you can profile the markets to help determine its moves, ‘thoughts’ and what drives it. When you know the drivers of something, this can in turn help identify where it might go next. Let’s take a look at some ways you can define a market profile. 

Long Term Movement Bias 

Timeframes play a huge part in determining how a market moves. Smaller time frames can look vastly different to the bigger picture, and trading in line with market direction is often very beneficial. Long term movement of a financial instrument can help unmask the concept of it’s purpose, who the market is aimed at and what outcomes arise from different market conditions. 

As an example, an index market generally rises slowly over many years, experiencing sharp declines in times of uncertainty and economic decline. When defining a trading plan around this concept, the trader might look to use the upward bias as a template for success, while factoring in how to mitigate losses in times of sharp decline. 

What bias does your favourite market have? 

Market Operational Influence 

Just like going to a popular store opening where customers line up to enter and purchase their favourite products, a market open may see similar influx of buyers and sellers. Volatility can be a blessing or a curse, depending on the trade style, so understanding the times when people are mostly engaging in market activity is important. Add to this, the operational requirements of exercising or expiring options, changes to the market constituents, updates to operators and key decision makers and other operational impacts, knowing the influence of market operations and changes made to these operational flows can be critical in mastering the market. Targeting key times of trade and knowing what to expect when changes occur can be very influential to the bottom line over a year. 

Seasonality 

Just like plants, markets hold seasonal properties to. They grow in certain conditions better than other times of the year, and country vs country can see inbound and outbound investment creating these seasonal conditions. Understanding the seasonality of a market can be very helpful. This is particularly true with soft commodities and currency pairs that are heavily influenced by the underlying seasonal trade. 

Range 

The general and recent range of an instrument can help determine things like ideal targets and stop loss positioning. Of course, this can be just like a piece of string, it’s always different. But in saying this, let’s use a little common sense and work with the information we have to identify a likely outcome. With all the uncertainty in the world, let’s use what we have to make ‘best practice’ decisions. Will the market move 5 points or 5000 points in the next hour or so? What has happened before, what has happened in the past 6 months and what has generally happened around this time of day. Getting a feel for the range an instrument moves and at what times is something that can be written into a trading plan. It may even be a percentage based on relative movement, but having an idea of what is likely is what we are trying to achieve as traders. Increasing our probability and accuracy is a large part of the job. 

Where to find information 

Finding the information on markets isn’t straight forward. It is important to map out the concepts you are looking to discover and understand in more detail. For example, considering questions like this – when do options expire and how are they implemented into the market at what time? When are changes to index market constituents decided and adjusted? What announcements are held periodically for the instrument?   

Once you have gathered questions you believe might help gain a deeper level of understanding of the financial instrument, you can then set out to get the information and map out a plan to use that information in your favour. To find the information, you often need to dig deep and search the official websites such as the official stock exchange you are researching, the reserve banks of the country underlying for the currencies you want to learn about or the bodies that maintain control over supply such as OPEC (for oil). 

There is a reason people working in these organisations are often banned from personally trading (insider trading) on the relevant instruments, the information is influential on price. Understanding these influences is critical to mastering the craft of trading the instrument, and critical for avoiding losing trades that could otherwise be averted. 

The price charts are also a wealth of information and data on the core component of trading, that is, price and where it moves. Using the charts to analyse movement, range, direction and other changes can be critical in understanding a market. 

Having a complete map and detailed assessment of the instrument you trade can heavily influence the outcome of your trading business long term. Depth of understanding and clear insights into how the instrument flows and functions can help drive better decisions and keep you aware of the day to day for that instrument. 

Using each characteristic to your benefit may help define your edge in the market.