Market mapping definition

What is market mapping?

Market mapping is a way for traders and investors to gauge the viability of a given trade or investment. Market mapping can be used to analyse different volatility levels and different prices for individual assets, or it can be used to analyse entire companies.

Example of market mapping

Market mapping relies heavily on fundamental analysis, most notably analysing the potential profitability of one position over another. Below are two simplified examples of a trader’s market maps. The first shows the perceived volatility level of different assets, compared to their respective costs. Usually in financial markets, high volatility provides the opportunity to profit by going either long or short.

As you can see, the trader in this example has established that bitcoin is a highly volatile, high-cost asset because its price can move by thousands of dollars in a relatively short period. On the other hand, the trader has set government bonds as their high-cost, low-volatility asset, because they require a lot of money to take a position on but generally are thought of as a very low-risk, low-volatility asset.

The second market map, found below, is an example of how a trader has mapped the stock market using different companies and their current stock prices against the estimated returns. To make this map, the trader has analysed each company individually and selected these four as possible opportunities depending on different market conditions.

To carry out fundamental analysis on a company, a trader would look at the stock price, leadership team and financial statements in order to make an assessment its ability to generate a profit. Other factors can also affect fundamentals, such as the geopolitical stability of the area in which a company is based, as well as current interest and inflation rates in the economy.

Pros and cons of market mapping

Pros of market mapping

Market mapping can help a trader identify a viable trade in a particular market, perhaps spotting a low-risk, high-profit opportunity that other traders had not considered.

Market mapping encourages traders to research a range of markets in considerable depth, meaning that they will get a consummate knowledge of the market and how to spot opportunities to profit.

Cons of market mapping

Effective market mapping can be very time consuming, and a trader will need to spend hours researching each opportunity in turn before deciding which of their options are the most viable for profits.

Even after all of this research, there is still no guarantee of success, as the markets could move at any given time and for a number of reasons – some of which are external to the financial markets.