Home | Finance
Identifying the market you are trading in can be an important in determining your trading strategy. I find this is critical for forex trading, especially when in a liquidating market. What I mean by liquidating is one dominated by book squaring rather than fresh positioning. I wrote the following article in latter part of 2008, during the midst of the global financial crisis when the need for capital and liquidity dominated, resulting in a liquidating market that lasted longer than most anyone could have anticipated. On the top of my forex 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 price movements tend to occur 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 de-leveraging and liquidation of positions appears 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 currency pairs had less to do with price or technicals than a need for liquidity. As a result, using technical indicators in a liquidating market can prove difficult. Copyright (c) 2009 Jay Meisler
Article Source: http://www.approvedarticles.com
Please Rate this Article
5 out of 54 out of 53 out of 52 out of 51 out of 5
Not yet Rated
