I was asked the following question, I have seen you use the term “liquidating market” and my question is how do you define it and how do you trade it?
What is a liquidating market?
A liquidating market is one where the flows are looking to exit positions and not add to existing ones.
For example, take US equities, which had built up significant long positions in anticipation of aggressive Fed rate cuts this year. As strong US economic data saw the number and timing of Fed rate cuts get pared back, US equities finally paid notice. The trigger, however, was geopolitics in the Middle East although a case could be made that someone finally woke up to rising US bond yields.’
S&P500 illustration of a liquidating market.
Once you recognize the market is in a liquidating mode, how do you trade it?
IDENTIFYING THE TYPE OF MARKET YOU ARE IN IS ONE OF MY KEY FOREX TRADING TIPS.
The way these types 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 bottom pickers come in. (and vice versa when short positions are liquidated).
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 squeezes those trying to pick a bottom as they get stopped out by fresh selling and a new low.
Much depends on whether key technical levels get triggered as this can accelerate the move and bring in fresh selling. Liquidating markets will eventually exhaust themselves and finally reach a bottom, either by a key technical level holding or by the selling just running out of steam.
How to trade a liquidating marker
The way to trade a liquidating market is either to sell (or buy as the case may be) on the backing and filling 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 (or buy =0 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 easy and in this case 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.
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Addendum
Trading a Liquidating Market:NAs100 Aug 19, 2025
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