I believe the reality is totally different than what we see or hear. Markets are not moved on news ..... strange? .... isn't it? ...... but that is truth that markets are not moved on news; actually markets moves on imbalance of Supply & Demand.
Why does this imbalance takes place? ..... so Smart Money or Big boys (Central Banks, Investment Banks & Hedge Funds) can make lot of profit. Yes they create this imbalance, by increasing the supply of financial instrument being traded they lower the demand so they can Accumulate (buy) the financial instrument in great number & on lower prices. This heaving buying creates demand which increase the price of financial instrument, then they Distribute (Sell) it on higher prices, by doing the they turn their millions in to billions.
Smart Money actually use the news to wrong foot the herd (90% of trader which loose the money). On negative news when panic takes place every body sell that instrument due to which supply increases & price goes down. Smart Money takes this opportunity and buy on lower prices which removes the supply & creates demand. Vice Versa practice comes in force, on positive news when herd buys the instrument Smart Money off load their holdings (Distribution).
So actually markets are moved on imbalance of Supply & Demand (artificially created by Smart Money or Big Boys). The volatility on news is to wrong foot the herd. The international media is bribed by Smart Money to release the good & bad news. ..... seems impossible ???? (Its true, if you don't believe me, they search the news on google about gold in August-October 2011 .... all the media was screaming that Gold is going to moon / Gold is going to go 5,000 USD per Oz ...... same time this Smart Money started Distribution (selling the Gold on higher prices to herd), it took about one & half year to off load their holdings ..... and .... then ...... see what happened with gold in march last year, the SAFE HEAVEN proved itself unsafe.
This is called Market Manipulation which retail traders can understand by interpreting the Volume information and can make profit.
The following user says Thank You to sajidghori for this post:
When I began forex about 2 years ago I read somewhere that banks make up of only 3% of the trading, but are responsible for 95% of the volume. There's your answer - Banks! When these banks enter in a position they usually swallow up everything in their way (i,e, stop losses of all the other trades).
Let's say a you're in a uptrend and price is approaching a major resistance level, the majority of traders always think that the trend is over and when price reaches these major levels, so they're analysis tells them it will go back down, so you go in short at that level with your stop just above it; Bank traders know market psychology pretty well, they know the herd always thinks that buy low and sell high will work. Of course, the price at this level is when a lot of people are getting out from their long position and placing short positions because this level held 2 other times. Recalling back to the beginner days, you should know trading is a zero-sum game, when you win, someone loses. Banks will place a long position once the market is in consolidation and allow people to think the level is actually going to hold, low and behold, they know stops for short positions are parked there so they decide to drive price higher, taking out stops and trapping people. This is what fuels moves the market. Of course I put it in layman terms so everyone can understand.
News announcement also moves market, but I steer clear of these announcement, In fact If i have a position in a pair where I feel will be moved by news, I put my stop loss very close to my entry to reduce my risk, or if I'm in profit I'll put it near a zone where I feel is good given my risk. Markets during major news announcements will usually only go one way. I Doing this reduces risk drastically, and actually some times, works in your favor.
I suck at explanations but I hope I simplified it as much as possible
Everybody knows that market-moving news can have a profound impact on both the direction and velocity of price trends in real-time. market is based on sentiments. even though the news is positive, and people start buying it long. making the market move up. but if the general market feel that the news is not as good as expected or for some other reason.to put simply, good money management is a method to Let your profits run and cutting your losses short. with my current Tickmill account use an initial % calculation from the dynamic money management model. Not necessarily 2%, but maybe 3 or 4%. with predefined stop loss, and trail, partial lot upon exit trade.
I think one of the elements that results in volatility based on news, is the surprise effect.
If there is news which was factored into the market and is in line of the expectation
then market might effectively go oposite direction, as all the news is already factored
into the market. If news is in line with expectation, but overpasses expectations then
movement is strong and in the direction of expectation.
Then comes the question on how to measure if it is already factored into the market ?
previous evolution ? open interest ? some research would be needed and it will never
be exact science.
It is clear that the market is made by the crowd. There are a limited number of large
professional participants and there is a large number of smaller participants. Depending
of the liquidity of the market and the clarity of the context, things can move with
larger or smaller volume.
The market has at any given time, fair value, high value and low value. Sometimes
the crowd likes to exaggerate, upon realizing it is exagerated, the counter reaction