Shakeout and day-to-day trade aspects

Shakeout (market traders getting kicked out of a large player) is a phenomenon which has experienced many experienced traders on their own and many merchants who are in a position of profit are either stops in the market or in some cases have lost some deposits, especially those who ignore the Risk Management and the position of the credit party has opened its position to a large extent.

Although the shakeout can be virtually found in all time frames, we are most affected by the traders who trade in the day and close positions before the clearing. This phenomenon is common to all trading instruments, but most often it occurs in volatile assets, such as oil, gold, stock indices (Dax, s & p 500, etc.), and cryptocurrency.

Shakeout in principle is one of the most difficult false breaks. In contrast, in this case, a simple false breakthrough is not only the price of the specific benchmark, but the entire buyer/seller's zone, the price goes up high in the above-mentioned zone, then stops at a certain price level, then begins the consolidation phase and from this accumulation zone the price moves in the direction of the existing trend.

The action on the market can only be done by a large player, thus trying to achieve several goals at the same time:

1) By excluding as much as the possible small retailer (so-called retail traders) through the stop-loss orders from the market. Since a large player has big goals and big capital, they do not need to be separated by retailers, Because in this case, it will be difficult for him to take the price to the point where he intends to bring it to make a bigger profit. As we know, small traders do not have big goals in comparison with large institutional traders as they are smaller in the market. They get satisfied once they start massively positioning to win the closing. This can lead to a change of trend direction, which will then cost more expensive to the large players. For the prevention of this event, a large player is a shakeout.

2) Additional liquidity from the market - As you know, the short-term player’s stop-loss warrants are an opportunity for the player. To be precise by accumulating additional liquidity allows gaining more profit in the event of a price move.

3) Small traders invented by stop-loss orders which will open new positions immediately after a favorable moment in the market. This should significantly increase the volatility of the market, which is in the interest of the big player
Let's now discuss the shakeout case with the example of American crude oil (CL).

Pic.1 - Shakeout downward trend

As we can see from the above picture, we have a sharp downward trend, whereas according to the chart based on the Charles Dow theory, each peak is of the previous peak is low and falling lower than the previous peak. However, at the price of 60.34, where the closest seller's accumulation zone, there was a violation of the mentioned level and consequently the total sales of the seller.

What happened above is the activation of stop-loss warrants of small players (in this case, sellers), their inventory from the market and their stop warrants have been used by the large player to open the sale order for the limit orders.. As we already know the exchange market orders (and in this case the sellers stop-loss warrants are nothing more than market orders for buying) connects with the limit warrants, In this case, a large player's sell limit warrants connected to retail market buyers, which became the source of additional liquidity of the player

Then, as the picture shows, the fine players saw that the 60.34 level was eliminated to change the direction of the trend and actively started to open the buy positions. By doing so, a large player took advantage of the buyers' stop-loss warrants, taking the price down and continued downward trend.

Taking into consideration all of the above situations, the question arises as how should we respond to retail traders when the shakeout is on the market and where and how to open positions to get the benefit from the market.

Pic.2 – Opening Shakeout 

Because we know that a large player uses small traders stop-loss orders to drive the price in the desired direction, we must wait till the buyers will get out of the market through the stop orders and with the market maker. At the expense of their stop orders, we have to open our position to get the benefit from the market.

The best point of this is the breakdown of the buyer's zone (from which the price shakeout) breaks the POC level. As soon as the price will fall below the above zone and we will have an increased vertical volume, we must take advantage of the situation and open the position.

The only disadvantage which is accompanied by shakeout-trading is that will have a relatively large stop-loss setup. But remember that shakeout is a very powerful form, and as a result, we have a stronger movement in our preferred direction. In most of the cases the loses and profits ratio will be between 1-4, which makes the trading of this segment attractive.

Source: ABFX