wide-scale selling of a currency pair
springing from trader fear.
This
regularly takes place when an event
occurs , forcing forex traders to
re-evaluate the forex pair's worth ,eg a negative company statement or an
economic crisis. Regularly when the event behind the panic-selling was a predicted event
rather than an actual event ( i.e. : talk about an
investigation, rumours of poor company figures, or
an analyst opinion), panic-selling can
spring from short-term traders pushing
prices down to trigger the stop losses of weaker traders. This
creates wonderful opportunities for
traders to open positions when the price has hit rock bottom,
ready for it to rise again.
When panic-selling, most forex traders just wish to escape from the trade
regardless of the price at which they sell.
The
process of panic-selling
One. An event
occurs to cause an currency pair price to speedily
drop.
Two. A day
occurs when there's a significant
volume of selling and purchasing, as
buyers and sellers attempt to take control of the trend:
purchasers try to push the price up,
and sellers try to keep it droping. Usually
the price fall plateaus on this day.
Three. If no
significant trend change occurs in step Two,
the currencypair price continues trending the same way,
though at
a lower volume.
Four. Steps
Two and Three repeat themselves until there's a
high-volume day which results in a long or short-term trend reversal.
Five. The process
continues until a long-term trend is established.
How to profit from panic-selling?
FX traders can profit
from panic-selling by selling currency pairs at the start of a sell-off, and purchasing
them back when the price bottoms-out, or by waiting for the price to
hit rock bottom, purchasing the pair at the low
price and selling them later once the price
is trending up again.
The exhausted selling
model ( ESM ) uses trendlines, volume, moving averages and chart patterns to
figure out when a price has hit rock
bottom. The rules of the ESM are:
- The forex pair price must first
speedily decline on high volume - A volume spike will occur,
making a new low, and seem to reverse the trend - A higher low wave must occur
- A break of the downward trendline must
occur ( i.e. : the price must break the trendline resistance ) - The Forty and / or Fifty day moving
averages must be damaged - The Forty and / or Fifty day moving
averages must be retested and must hold
What about panic-buying?
In
theory, panic-buying would be the exact
opposite of
panic-selling: the wide-scale purchasing of a
forex pairspringing from investor
trepidation,
with most traders just wanting to
go into the trade, not caring about the price at which they buy.
Nevertheless it's much
more difficult to identify panic
buying than panic selling, as it is generally
assumed that traders buy based on risk and return assessment, and set stop losses and profit
boundaries when they open a trade.
This is not
necessarily right: panic
buying happens when traders fear losing out
on the profits that everybody else is
making, and this fear hinders them from
evaluating and opening a trade based on their trading method. One example would be the
panic buying in the silver market from Jan 28 to
Apr 25 2011: buyers drove costs from
USD26.40 per oz to USD49.80 per oz, a gain of almost
90%.
Then, in the first
week of May, over 1/2 those gains
evaporated in just 4 trading sessions. The
existence of panic buying means that traders can profit on it as
well as on panic selling if we use an exhausted buying model (
the complete opposite of the ESM ), it might make it clear
that :
- The forex pair price must first
rapidly spike on high volume - A volume spike will happen,
creating a new high, and appear to reverse the trend - A lower high wave must happen
- A break of the upward trendline must
happen - The 40 and / or 50 day moving
averages must be broken - The 40 and / or 50 day moving
averages must be retested and must hold
To
sum up
Panic selling ( and
panic buying ) creates great trading
chances for traders who are educated and alert.
The technical indicators in the ESM offer an
effective method for building
the best entry point for going long ( or going short, in the case of panic
buying ), and the incontrovertible fact that the model uses 1 or
2 technical indicators can protect traders from
costly mistakes.
Remember that CFDs and forex are leveraged products and can result in losses that exceed your 1st deposit. CFD trading may not be appropriate for everybody, so please ensure that you fully understand the risks concerned.
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