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Saturday October 25, 2008 - 00:04:58 GMT -

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Forex Blog - Liquidating Market - When Will It End?

On the top of my trading checklist is to identify the type of market you are trading. Is it a trend, sideways, range, congestion, consolidation, or liquidating market? These can be subjective terms and often not clear until after the fact but having a feel for the type of market you are trading can be a valuable tool.


For day traders, liquidating markets can be difficult and timing is important. One reason is that movements tend to come in spurts.  This is often characterized by sudden moves when a liquidating order is executed and then limited follow through once the order is completed unless the move sets off stops or violates technical levels that trigger fresh selling (or buying as the case may be) and more liquidation. This often sees price moves set up false bottoms or tops (depending on whether it a bear or bull market) once the order is done, then backing and filling before the next order hits the market.


In the current environment, liquidations have been dominating for some time. Normally, liquidating markets do not last long as positions and stops get exhausted. Then the market has to decide whether to continue this as a trend or reverse once the liquidating flows are done. However, we are in extraordinary times with extraordinary volatility driven by extremely high levels of risk aversion. The extent of the unwinding and de-leveraging of positions seems never ending. Just when you think how much more can be left in the market, another wave hits. For that reason, those trying to trade it as a “normal” market, searching for bottoms or tops or reacting to news, have been in a perpetual squeeze and run for cover. It is not easy to avoid the temptation to “bottom fish” or contra trading so discipline and quick feet are needed to trade that side. Those who continue to trade this as a liquidating market and avoid the temptation to “bottom fish” have been rewarded. . In any case sound money management is needed to navigate the volatility.


What is behind a liquidating market?

Examples of what is behind a liquidating market are illustrated in updates posted by Shanghai bc on the Global-View Forums this week and are worth repeating. It suggests selling of currencies had little to do with price or technical levels but a need for liquidity. This is why trying to trade off technicals in a liquidating market can often prove difficult.


shanghai bc 12:27 GMT October 22, 2008
Euro and Pound liquidation:

The main flow was from Japanese funds and banks repatriating what they can to shore up their stocks..Money from Australia i.e Aud/Jpy was used up a few weeks before..Now money from Europe i.e Eur/Usd and Gbp/Jpy being used up this week..Japanese contingent may have done their repatriation by and large this week..Chinese are not interested in repatriations from Europe and that is a non-factor..So even if the Japanese want more repatriations later, they are highly likely to wait till Euro and Pound bounce a bit from the present levels..


Then after a pause on Thursday, the market resumed its panic driven liquidation on Friday.


Shanghai bc 11:16 GMT October 24, 2008
All started from panic driven
Tokyo stock market..Margin calls have to be met and Yen repatriation and liquidation is the only solution those investors have..And the herd-instinct of those types of investors all moving in the same direction with tens of billions like snow avalanche..Forex market is dancing to the tune of stock markets at present..Unless we see very strong US stock performance tonight,we may have the repeat of today next week till money runs out or investors are thrown out of the market..Nothing like panic-driven market..Then,once this panic is over,the bounce will be almost as fast as its drop..Trading lightly or stay out of the market is not a bad strategy in market like this because we never know which bullet will catch us in a panic-driven market..Never dance with unpredictable partner..All the best..


So, how long will this liquidating market go on? If I had the answer I would not be typing now but sipping a drink on my own South Sea island waiting to cash in my chips. In any case, there is little choice but to let the flows play out and for charts or price action or some other event tell you when the liquidating markets have run their course or at least ready to take a breather. In this environment, eur/yen is acting as a key barometer of global risk aversion/appetite and should continue to be used as a guide going forwards.


Jay Meisler



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