Market fundamentals. Part 2 - Page 92
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Thread: Market fundamentals. Part 2

  1. #1
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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:

    Attachment 1092

    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:

    Attachment 1093

    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 09:36 PM.

  2. #911
    Trader ara's Avatar
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    Quote Originally Posted by layigold View Post
    I equally experienced that event in 2008 though I was a baby trader then because I only had two years of trading experience. I saw myself selling GBP/JPY and I did not know why the pair had to crash seriously like that until I got to know that big players were moving their money to less risky assets they considered safe haven as at then and now I know better that such a case is called "flight to safety".
    well, you have a lot of experience in forex, more than 10 years, it was amazing.

    I'm sure you enjoy the profit from your short position at that time. I was also a baby trader at the time, but I trade with traditional market logic, and it makes me lose a lot of money in GBP/JPY, I don't know about safe haven and Flight to safety at that time, I only know a few years after that. Actually it's a very favorable situation for traders to follow the trend, but maybe CHF is still the king of safe haven currency.

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  3. #912
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    the fundamentals can be known as well for all the traders . but the thing which they may go different is the executing way or the general translation for the real understanding for these fundamentals . thus the results get different and here we have professionals and less professionalism according to the way they use the fundamentals of the market which they have .

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  4. #913
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    Many forex traders may assume that forex trading can be an easy thing. But in actual fact it is a fully wrong concept. If any trader wants to earn adequate trading profit then he must try to ensure work with right trading methodologies and strategies. Even the progress in trading decisions of a trader should be based on market circumstances so that he can adapt his whole trading voyage in resourceful behavior.

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