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 â€śnormalâ€ť 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 â€śbottom fishâ€ť 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 â€śbottom fishâ€ť
have been rewarded. . In any case sound money management is needed to navigate
What is behind a liquidating
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 bcOctober 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 bcOctober 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 SouthSea 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.
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