Liquidating Market - When Will It End?

I wrote this in the latter part or 2008, when financial panic had gripped global markets. This led to liquidating markets that lasted longer and went farther than most had anticipated. Identifying the type of market you were trading was crucial during this period but is also important during normal conditions as well. Markets are like dynamic organisms, always changing and you have to be aware of changing conditions so you can adjust your trading strategies accordingly.

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.

Day traders may find liquidating markets difficult and timing can be important. One reason is that movements tend to come in spurts. This often sees sharp movements when a liquidating order hits the market and then limited follow through once the order is finished unless the move triggers stops and/or breaks a key technical level that brings in fresh selling (or buying as the case may be) and
more liquidations. 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 proper money management is required to manage 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