Beware of algos impact on the markets
Nowadays, there’s lots of algorithmic trading in the markets which is generally responsible for short-term moves. When you see quick spikes in the price, that generally happens because of algos. These are automatic algorithms that are programmed to identify opportunities in the market based on certain inputs and are almost always the first to move the price. There are even algos programmed to exploit other algos. Some examples of these algos in play is when you see big sudden spikes in the price as a news or economic report hits the newswires. This happens regularly and the trick is to identify when the reaction is right or wrong.Algos don’t have the human foresight (not yet at least). There are many cases of them moving the price in the wrong direction. For example, when an economic report gets released and looks good on the surface, but its details are bad. In such cases, you would see a spike in the direction of the good-looking headline but then a fade of the move later as the real money starts to trade in the opposite direction. Sometimes though they are right, and for a day trader the tricky part is that they may have already moved the price for the average daily range. In such instances, you might see a pullback before another wave in the direction of the spike. Knowing this can help you fade the algos reaction as per your individual bias when you think the reaction is wrong-footed and enter at better prices or join the momentum that’s going to be created if the reason is in line with the fundamental direction.Some other examples of short-term spikes can include what is called a “fat finger”. That’s when some large institution enters the market with a huge size by mistake and immediately closes the position. Other times it may be just a low liquidity time and a too much big order may not find counterparts near its price causing the price to move more than usual and some algos might exacerbate the move because of some momentum inputs. This article was written by Giuseppe Dellamotta at www.forexlive.com.
Nowadays, there’s lots of algorithmic trading in the markets which is generally responsible for short-term moves. When you see quick spikes in the price, that generally happens because of algos. These are automatic algorithms that are programmed to identify opportunities in the market based on certain inputs and are almost always the first to move the price.
There are even algos programmed to exploit other algos. Some examples of these algos in play is when you see big sudden spikes in the price as a news or economic report hits the newswires. This happens regularly and the trick is to identify when the reaction is right or wrong.
Algos don’t have the human foresight (not yet at least). There are many cases of them moving the price in the wrong direction. For example, when an economic report gets released and looks good on the surface, but its details are bad.
In such cases, you would see a spike in the direction of the good-looking headline but then a fade of the move later as the real money starts to trade in the opposite direction. Sometimes though they are right, and for a day trader the tricky part is that they may have already moved the price for the average daily range. In such instances, you might see a pullback before another wave in the direction of the spike.
Knowing this can help you fade the algos reaction as per your individual bias when you think the reaction is wrong-footed and enter at better prices or join the momentum that’s going to be created if the reason is in line with the fundamental direction.
Some other examples of short-term spikes can include what is called a “fat finger”. That’s when some large institution enters the market with a huge size by mistake and immediately closes the position. Other times it may be just a low liquidity time and a too much big order may not find counterparts near its price causing the price to move more than usual and some algos might exacerbate the move because of some momentum inputs. This article was written by Giuseppe Dellamotta at www.forexlive.com.
