After years of trading high impacting news releases in the forex and futures markets, by using expensive high end news feeds and specialty software to trade market “spikes” (fast move up or down), I began to see a particular pattern emerge within these spikes. Not only for news releases but for MANY other reasons as well. Some of these reasons can be: break of support or resistance areas, broken trend line, price breaking through big round numbers, break of popular moving averages, natural disasters, breaking news, etc.
Every time this happens traders and automated trading robots enter the market (in milliseconds) for quick profits. This causes the markets to spike. Sometimes you might see these moves and join in. Then what happens to this move, the breakout? It turns right around and heads back to your stop loss or point of origin. From that point on it’s anybody’s guess as to where it might go.
The reason for the spike was the reaction from the robots and the very fast traders, but what was the reason for the spike to collapse and head right back down to your stop loss? The answer is simple: Profit taking -or- exiting of positions by the traders and robots that entered into the market before you did. I’ll explain. Continue Reading