This morning thousands of traders woke up having their positions taken out account wiped out and being left with wondering why and how did this happen.
My chart shows a low of 1.19164 on Pepperstone but has been noted to fall as low as 1.11.
Lets try and break this down and make sense of it.
The rumor is algorithms or a fat finger caused the flash crash. Technically the support at 1.26000 was broken and from there the pound became a bottomless pit.
Low liquidity and volume I believe to be the main driver for the Pound crash . All it takes it one massive trade to sink the market on low volume. Quick in and out and a few hundred million dollars richer for someone today. Call it manipulation all you like but the fact is everyone is in it for the money and if you can do it why not.
The other reason long stops were hiding just under this level of 1.26. As long stops were all taken out the momentum of the fall cascaded.
The pound recovered quite quickly which indicated there were some buyers around the 1.20 levels. We must ask ourself why was it bought back quickly and with heavier volume than the drop? This is telling us sellers were not committed at all and was a once off trade to clean up long traders.
At this stage its become a bottomless pit and there is no telling how low the pound will go. Until we now see either a bullish candle on the daily or weekly there is really no foreseeable potential upside.
On the other hand on these occasions when there is an unexpected crash like this one, it may have reached the bottom, can easily be flipped around. For such a big drop it has accomplished this on very low volume. Those who go short now may possibly find it may not go down anymore for a long long time to come.
I think cable will stay at a low liquidity level for some time. We now need to wait for London to open for some insight on why this has happened and which way price will go from here.
The pound crashing this morning did so faster than the day of the referendum vote but has recovered quite quickly. See charts below.
Market manipulation and dealing desk brokers.
Was the pound crashing due to market manipulation?
For me I say “no” and I don’t believe in market manipulation and only believe in supply and demand. There was a lot of talk of brokers freezing up accounts which traders were unable to take profits. These again are dealing desk brokers and had no option but the freeze their clients accounts. This kind of event can potentially send dealing desk brokers broke. ECN brokers had no issue with the event except for widening spreads.
Just think how many traders lost their account with these kind of brokers and those who were on the right side only made a 10th of the profit they could of.
There were a lot of traders that lost their entire pot on this event and don’t think its was just retail traders that were taken out. Believe me when I say this but Banks, brokers, and fund managers all lost out on this and millions of dollars not just a few bucks in a cent account.
Money Management is KING
This brings me onto the subject of money management and its something I am still yet to explain in detail as yet ( there will be a post coming up on this).
I were also long on the pound but only down 3%. I rarely use a stop loss but trade with no leverage. There are two ways to combat risk.
Every time I hear traders loosing their accounts and blaming market makers, brokers, and everyone else except them self it all boils down to money management.
Only Money management is important entry is only seconded. Anything can happen in the financial markets and when trading you must use some strategy to protect your account.
What now for the Pound?
I would like to see where this week and daily candle will close. Its a high possibility for a massive weekly and daily pin bar/hanging man. If this is the case its highly possible that the pound could rally from here.
Best option is to stay out of the GBP pairs. As long as low liquidly prevails, volatility will remain high.