When you see a sharp move down or up in a currency human nature is to look to catch a turn by buying low or selling high. However, more often than not this turns out to be a sucker bet and I will tell you why.
The reason is you are acting as a liquidity provider rather than a trader and “hope” that you time it right, a word that is not in my forex trading dictionary. All you are doing is providing liquidity for whatever flow or flows that is overwhelming the market’s ability to absorb it.
What is a core liquidity provider?
A core liquidity provider is an intermediary that trades significant quantities of assets to help ensure that market participants can consistently buy and sell assets when they wish. Liquidity providers perform important functions in the market such as encouraging price stability, limiting volatility, reducing spreads, and making trading more cost-effective. Banks, financial institutions, and trading firms are key players in providing liquidity to different parts of the financial markets… Investopedia.
Think about it. When you see what looks like a straight line move on a chart it indicates an imbalance between supply or demand. If the candle points up, the market is having trouble absorbing buying. If the candle points down, the market is having difficulty absorbing selling.
Most times this is the result of an order flow that the market is having trouble absorbing although it can also be a reaction to a news event. In these cases, the market will keep moving in what appears to be a straight line (i.e. no retracement) until it reaches a level that brings in selling/buying
Illustration of a straight-line move
Remember, markets can remain irrational longer than you can remain solvent so don’t try to outguess it unless it is part of your trading plan to establish a position at a specific level. .
This may sound like good advice but in the heat of battle, the temptation is to try and outsmart the market by trying to pick a low or high before there is a reason to do so. I have tried it and am sure you have as well with obvious results. So, the moral is to act as a trader and not a liquidity provider.
Feel free to contact me at jay@global-view.com wioth any questions or comments
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