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Liquidating Market - When Will It End?

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Published: 31Jul2009
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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.

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.

Jay Meisler is a co-founder of Global-View.com, the leading forex discussion site for more than a decade and where traders from around the globe come for the latest breaking news, flows, rumors and trading ideas =>http://www.global-view.com

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