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How to Trade in a Liquidating Market

14 Years ago | October 15, 2014 12/9/22, 12:00 AM

One of my forex trading tips is to identify the market and when it goes into a liquidating mode you need to adjust accordingly. I wrote an article in April in response to a question on how to trade a liquidating market. Given the price action today and recently (e.g. freefall in oil, stocks retreating sharply, bond yields plummeting, long dollar unwinding), which is clearly driven by position liquidations, See how to trade in a liquidating market.

Before I go on, I need to address a change in markets, where banks have scaled back trading and risk trading. This has reduced liquidity and left markets vulnerable to volatile swings when there is no one to take the other side. Keep this in mind, especially when markets become one-sided and then start to correct.

April 8, 2014

As I have noted, our role as a trading advocate is not to give specific trading advice but we can give our insights, such as your question on liquidating markets. A liquidating market is one where the flows are looking to exit positions and not add to existing ones. For example take USDJPY today, where the market had built up long positions expecting the Bank of Japan to signal a willingness to ease policy if conditions warrant, Instead, Bank of Japan Governor Kuroda, following the policy board meeting, indicated that the central bank saw no need for more monetary stimulus to exit deflation. This saw the JPY firm on various crosses and USDJPY fall sharply in what would best be described as a liquidating market.

So once you recognize the market is in a liquidating mode, how do you trade it?

The way these type of markets tend to trade is that they move in spurts as orders get executed and positions liquidated. Once the order is done, you may see some backing and filling as selling (as in the above case) is done and buyers come in looking to catch the low. This often gives a false sense of a bottom as the market backs away from the low until the next wave of sell orders. This leads to a squeeze on those trying to pick a bottom as they get stopped out by a fresh wave of selling and a new low. The extent of the move depends on whether key technical levels get triggered as this can accelerate the move and bring in fresh selling.  Liquidating markets will exhaust themselves and finally reach a bottom, either by a key technical level holding or by the selling just running out of steam.

The way to trade a liquidating market is either to sell on the backing and filling (blip up) but that is often difficult as it is hard to find a nearby stop if the chart is like a one-way street. Another way is to put a stop entry at the low or high to go with the next wave of sell order liquidations. The other way is to wait it out and only go against the move if you sense it has completely lost steam. However, the tendency is to buy at each pause, hoping to catch the falling knife after a new low. The danger in this approach is that by the time a low is in place you may be too beaten up to catch the bottom.

The key point is to recognize the type of market you are in and that the hardest trade is often the right trade.  The wrong trade is to buy the easy to get filled at what looks like an attractive level trade.

Note I used a market that is liquidating long positions as an example. The same principle applies to when short positions get liquidated.

Feel free to ask questions of comment by sending an email to

Jay Meisler, founder

Global Traders Association

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