We
at OmiCronFX are essentially trend traders. We spend a lot of time working out
ways to identify a trend, and ride it into profit, using our algorithmic
routines to assist us in this. We do not care whether this trend is up or down
as the Forex market lends itself very nicely to trading in either direction.
The
alternative to a trending market is a ranging one. During these times it is a
matter of adjusting the parameters of our software to take small wins or to
simply avoid losses. During the month of August just gone, we had plenty of
practice in these techniques, as the market was ranging for much of this time.
The EURUSD daily chart above is a typical example of this.
Very
often, if the range is prolonged, the best course of action might just be to
stand on the sidelines, and this is what we found ourselves doing. There are
now signs that volatility, which tends to presage new trends is starting to
enter the market.
…and
possible funny business
Ranges
can be treacherous periods in trading for another reason. During times of low
activity, large participants find it easier than usual to move the markets.
They will sometimes do this in order to engage in the activity that has become
known as “Stop hunting”. This is where the price is artificially moved, for a
short period, to a price where it might be normal for a large number of stop
loss orders to be placed. Once these are taken out, price goes back to where it
was.
This
phenomenon can be caused by large institutions that are seeking liquidity. What
this means is that they have a very large order which, if placed during times
of low volatility, will not be easily filled. This order could be hedge and the
institution will want to place the whole order as close as possible to the
current price. Using some of their economic muscle to drive price either up or
down, to where they take a view that stops are placed, will bring a large
number of smaller players into the market in the direction in which they require their counterparties
to be, thereby increasing liquidity and allowing them to get their fill.
The
spikes highlighted during the ranging EURUSD market in August shown above could
just represent points at which stop hunting took place.
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