Forecasting the markets is like forecasting the weather. Both are complex, dynamic and chaotic systems. And in both it's impossible to make 100% accurate forecast. Too many "random" variables and unknowns. However you can make some approximate forecasts within short time frame. For example no one knows what exactly will be the weather next month, but we are pretty good at guessing for the next few days. Same thing in the markets. The more you stretch the time frame - the more random variables you add..... so long term it's reduced to randomness, and even to make rough forecast becomes impossible.
In the markets the most important thing is the fundamental context. Fundamentals(news, numbers, rumors ......) are the seeds of all price movements. But they have limited impact. As soon as new information comes out, the initial reactions are usually the strongest, then the impact decreases exponentially. Just like in weather! When the hurricane hits the ground - strong initial impact, and after that things slowly go back to normal. Only the damage remains.
What about financial hurricanes? (flash crashes) What are they? What's causing them?
The biggest price movements are caused by risk events. Usually unexpected bad news.
But not all unexpected bad news lead to crash. The news have to come at the right time, in the right technical context!(perfect storm)
From a pure technical perspective, the perfect condition for a flash crash is when significant part of the market participants are holding positions in the same direction.(This usually happens due to some fundamental expectations on a large scale.) We call this group "trapped traders". As soon as the market start to go against the trapped traders, the normal chaotic market structure turns into order.(self organization) The reason is because all traders have the same position, they all lose money at the same time, and they all start running for the exit together and this creates temporary market panic.. This causes large demand for instant liquidity in short window of time and creates very risky situation for the market makers. So they start to pull and reduce their orders(liquidity) and this accelerates the price move even more.
The biggest flash crashes happen when there is lots of trapped traders (large volume) in combination with unexpected bad news.
The flash crash is the strongest possible signal in the markets and represents the biggest opportunity to make huge amount of money with minimal risk. But also represents the biggest danger (if you are trapped on the wrong side).
Flash crashes are not something rare today. Not at all! Actually they happen almost daily on the micro time frames. And there are only 2 ways to trade them.
1. Fade them in ranging context (go against the trend).
2. Trade with the crash in trending context.(fade the people who fade the crash)
But you NEVER go against flash crash on a large scale.
In the markets the most important thing is the fundamental context. Fundamentals(news, numbers, rumors ......) are the seeds of all price movements. But they have limited impact. As soon as new information comes out, the initial reactions are usually the strongest, then the impact decreases exponentially. Just like in weather! When the hurricane hits the ground - strong initial impact, and after that things slowly go back to normal. Only the damage remains.
What about financial hurricanes? (flash crashes) What are they? What's causing them?
The biggest price movements are caused by risk events. Usually unexpected bad news.
But not all unexpected bad news lead to crash. The news have to come at the right time, in the right technical context!(perfect storm)
From a pure technical perspective, the perfect condition for a flash crash is when significant part of the market participants are holding positions in the same direction.(This usually happens due to some fundamental expectations on a large scale.) We call this group "trapped traders". As soon as the market start to go against the trapped traders, the normal chaotic market structure turns into order.(self organization) The reason is because all traders have the same position, they all lose money at the same time, and they all start running for the exit together and this creates temporary market panic.. This causes large demand for instant liquidity in short window of time and creates very risky situation for the market makers. So they start to pull and reduce their orders(liquidity) and this accelerates the price move even more.
The biggest flash crashes happen when there is lots of trapped traders (large volume) in combination with unexpected bad news.
The flash crash is the strongest possible signal in the markets and represents the biggest opportunity to make huge amount of money with minimal risk. But also represents the biggest danger (if you are trapped on the wrong side).
Flash crashes are not something rare today. Not at all! Actually they happen almost daily on the micro time frames. And there are only 2 ways to trade them.
1. Fade them in ranging context (go against the trend).
2. Trade with the crash in trending context.(fade the people who fade the crash)
But you NEVER go against flash crash on a large scale.
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