Wednesday, May 25, 2016

How Do Trends Form in the Forex Market – Part 2

In the first part of our article, we’ve discussed about the most common reason of trend formation in the forex market. We’ve learned that an imbalance in the amount of buyers and sellers in the market is what usually triggers trends to form.

trends

Another factor that leads to the formation of the trends is when liquidation occurs in the forex market. Liquidation usually occurs when a trader starts closing his open position to stop further losses. This can also happen when the market prices hit the stop loss initially set by the trader, but in most cases it is done manually by the trader due to other market reasons, such as profit taking.

The liquidation phase is basically an outcome of the imbalance that is occurring in the forex market. When the prices start to go in the opposite direction of the traders’ open positions, it encourages them to close their open positions to stop aggravating their losses.

If enough traders exit their open positions, it will cause another imbalance in the forex market. When a flood of sellers enters the market, the market prices will be pushed further downward, triggering a downtrend.

downtrend

For example, the market is currently in an uptrend, which basically means that there’s a lot of traders that has a long position in the market. When the market reaches a price high enough for traders to consider it as profitable, it will encourage them to close their open positions and profit from the price increase. If enough traders decide to close their positions, it will bring a flood of sellers in the market, which will trigger the market prices to move in the other direction (downward). And since the prices are going down, many traders will fear that this trend will continue, so they also start to exit their open positions, bringing even more sellers in the market, and thus pushing the prices further downward. This event will break the recent uptrend in the market and will be replaced by a downtrend.

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