Market fundamentals. Part 2
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    Market fundamentals. Part 2

    Hi traders!

    First side of this topic you can find here

    We've started talking about behavior of "big buys" or "smart money" (institutional) players. Basic assumption is the following - they rarely come to the market and buy all they want.
    They try to patiently accumulate, act near hot spots.

    Yet, there is particular situation when smart money players start acting like a "crowd" (they bring big volumes and do it very urgently)

    It is called "Flight to safety" (or "flight to quality" in some sources)


    Flight to safety


    It can occur when something catastrophic and unexpected happens. For example, war or terrorist attack, large bancrupcy, financial crisis and so on.

    There are lots of examples when market reacts too rapidly and too emotionally.

    For example - housing bubble crash in 2008 (known as "World Financial Crisis"), Asian crisis, "Dot-com bubble" crash e t.c.

    If "flight to safety" is in play, all short term trading techniques (for example - pivot points, channels or trend lines, divergencies and others) may work against short-term trader because traditional market logics doesn't work in such circumstances.

    During 4th quarter of 2008 I was short-seller and I've seen with my own eyes that all short-term trading systems was broken. Market was simply breaking level after level and falling down without any rest.


    Look at this chart:

    flighttosafety.jpg

    It is AUDUSD, one of probably most volatile currency pairs for that period.

    You may notice that selling pressure is enormous - market needs slightest trigger to start falling. In these circumstances traditional short-term logics will not work, especially if you work counter-trend.

    Now look what happened with the price of gold:

    gold_history.jpg

    All major indices, currencies and commodities were in down-trend, and Gold market only showed strength.

    This is classical pattern of collective behavior called "Flight to safety"

    Investors extract money from assets considered as "risky" and put them in "safe" assets.

    Housing bubble of 2007-2008 was called "Global financial crisis", but from time to time, less global bubbles blow up, and money is being transfered from commodities or stocks to treasury bonds with guaranteed income, though it (income) is very small. But investors are driven by fear and simply want to save their money and purchase these assets not for yields.

    If you guess, that something similar happens on this market - be aware.

    Traditional market logics will not work here - market will make enourmous "squeezes" in the the destination of the trend. Though, you can just hold your position and enjoy profits.

    But be also aware that such type of market conditions is relatively rare one, so don't reinvent the wheel - use your approach until something big will happen.
    That's why sometimes it's useful to know what's going on in the world.

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    Last edited by Value trader; 10-17-2013 at 08:36 PM.

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    Thank you for the detailed article sir, I agree with all these that you have explained. It is still about the rules of demands and supplies, and this is how the overall players are doing in the market, the ones that have the highest power takes it at the end, it goes like that all the time in the financial market no matter the side of trading analysis they are. Please sir, what do you mean by housing bubble?

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    Registered user Russel2012's Avatar
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    yes that part was really too necessary to me... Fundamental is really too critical subject... So we need to be expert to learn perfectly.. here is needed perfect experience to make better analysis of fundamental... That part can help me to be more experience about fundamental ...

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    Quote Originally Posted by cozard007 View Post
    Thank you for the detailed article sir, I agree with all these that you have explained. It is still about the rules of demands and supplies, and this is how the overall players are doing in the market, the ones that have the highest power takes it at the end, it goes like that all the time in the financial market no matter the side of trading analysis they are. Please sir, what do you mean by housing bubble?
    "Housing bubble" in US market leaded to Global Financial crisis, when "Lehman brothers" (one of the largest investment firms on Wall street) has gone bankrupt in September 2008.

    Large investment banks have issued complicated derivatives connected with mortgage loans (CDO e t.c.). Housing prices were rising every year.

    When it was clear, that not every borrower is capable to pay, large holder of "CDOs" - investment bank "Lehman Brothers" was in trouble. Stocks of Lehman started to fall and finally it has gone bankrupt. It has huge impact on markets - large insurance company "AIG" was going to go bankrupt too, but FED (Federal Reserve Bank) had intervented and rescued everybody.

    Consequences of this crisis are not gone for now, nobody knows how it will impact world economics. FED continues printing dollars and buying back US bonds.
    Now we have bubble on US government bonds.

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    Registered user rajahentai's Avatar
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    i see the same thing many times, when obama just won the election for USA president for the second time, the USD currencies was dropped like hell, it was because of fiscal cliff and many other things they fear over obama's policies. still. there is many other things as a good fundamental views, one of my favorite was shinzo abe's pre and after election. JPY was weakening absurdly that time, i still remember seeing it at 77 then the next few days it already hit 82.

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    Rookie rinaji's Avatar
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    World Financial Crisis... Yea I remember that, I lost a lot of money in this situation, when I was still a beginner trader who does not know much about global economic conditions, only know the technical analysis of charts. It's a tragedy that I will never forget at the beginning of my career as a trader. And one more situation that made ​​me lose big. That is when the Greek crisis of last year.

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    Today was elections in GERMAN FEDERAL ELECTIONS and market is closed . And thankfully in any of the EUR pairs or crosses, i dont have any open positions at all. And i believe, most of the EUR pairs/crosses will opeen with gaps of at least 20-40pips or more depending on the elections results. What you all say ?

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    Your post really says that fundamental high impact news releases really has very very high impact on the trend . Either it changes the trend reversely or continues but the effect is great. Surely anyone just trading on technical analysis wont do much good on long term. But if he/she puts stop loss in place , then i believe he /she can be saved from much more losses. What say?

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    Quote Originally Posted by taharoyal52 View Post
    Your post really says that fundamental high impact news releases really has very very high impact on the trend . Either it changes the trend reversely or continues but the effect is great. Surely anyone just trading on technical analysis wont do much good on long term. But if he/she puts stop loss in place , then i believe he /she can be saved from much more losses. What say?
    Yes, if you are short-term trader, it would be hard to benefit from those movements.
    But some risk-seeking traders can succesfilly work within volatile market conditions. Volatility is also opportunity. If you choose right destination for you trades and simply stick to your winners, why not?

    But I agree with you, for most people it ends up poorly and I would suggest to be aware of this kind of market

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    I agree with what you have explained. it is all about how you percieve this market according to your understanding butnever the less It is all about demands and supplies and is the way traders are playing in the fx the market. So emphasise more on broading the horizen of your undersanding of this remarkable world .

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