Friday, August 29, 2014

Trends and ranges | …and possible funny business

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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