Price testing in forex

Institutional trader accumulating huge volume in forex instrument, can certainly mark the price down. There is no way to mark the price down for him, if the crowd is selling at the same time without him losing capital. To try to mark the price up while everyone else sells is terrible business. so terrible in a fact, that it can ruin even the wealthiest of trading institutions.

 

Logic behind testing in forex

 Sucesfull test: Immediately followed by stregth reaction.

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  • There is inherent trading danger for market makers in bullish positions, in form of supply (selling) flooding the market. This supply will act as a massive resistance slowing the price down, or completely reversing the upttrend, thus sabotaging buying of professional forex operator.

  • Bullish market operators must therefore absorb selling, if they want the uptrend to continue. If they are forced to absorb selling on relatively bad (high) price, it may further increase selling to the point that trend becomes unstable and transforms into the bearish downtrend.

  • With enough time, institutional trader can remove floating supply from the market, even on negative news.  But he must be sure, that floating supply was almost completely removed from the market, before he continues to support the uptrend (by trading long).

  • Best way for him to test the waters is to mark the price down rapidly (test). This will be a call to action for anyone who wishes to sell already, to do so. Hight of the volume on  marked down price (test), will tell the market maker about potential capital interested in downward move. Low volume signalises low interest in downward move. Test will also remove stop losses at lower price levels.

 

Recognising price testing in forex

 Failed test: Market has not responded with strength. Interest of general public in downtrend will overcome uptrend.

 

  • Sudden downward move. Strong market responds with immediate strength reaction test candle will be seen as narrow candle with extremely tall bottom wick, immediately followed by strong bullish candle with increased volume.

  • Every market that doesn't respond immediately to a price test is considered weak (bearish). Strong market always responds to test by immediate price increase.

 

Same tests mechanics can be found also in bearish downtrend in forex. Test will point upwards and it should be immediately responded by another price decrease in healthy downtrend. Trendlines drawing, forex indicators, supports/resistance zones, those are all tools that could help you tremendously to identify and trade test in your forex strategy.

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