Why Do Pullbacks / Retracements Happen?
When price moves from A to B, it rarely moves in a straight line.
To get from A to B, price moves in that direction, retraces a little, then moves in that direction again.
Why does that happen ?
1. Natural supply / demand dynamics
The further price stretches up the less buyers join into the move. After some time whoever wants to buy already has bought. The others which have not yet will look for a retracement to buy again or to even short the move.Sellers will inevitably start testing the move. To see its strength at a point where they feel buying is at its weakest. As the sellers join the fight, buyers will see the upward momentum drop. Some will begin to sell out pushing momentum further down. The market makers who are moving the market the most will also reduce their buying pressure so they can save their capital to support the market after the retracement In order to ensure that there will be a higher swing low.
2. Manipulation by market makers.
"Saving their capital" sometimes generates whole trends, rather than just a small pullback. Long uptrends for long periods of times will eventually finally hit consistent supply above which MM will not be able to push further. At this point the big players will start dumping a large amount of their supply the market goes into a steep decline covering almost the entire distance of the uptrend before the big player starts to scoop up all the inventory at a low price and repeat the upside move again.
3. Shaking out weak hands
In order for a market to push higher. It needs to shake out the weak hands by engineering pullbacks. Weak hands will provide the necessary liquidity for the market maker to push the price higher.
4. Stops hunting. Market makers know perfectly well there will be traders moving up their stops up with the market. They will hunt them down. Sophisticated algos and trading programs will be used for this which further adds to the supply that causes retracements to occur.
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To get from A to B, price moves in that direction, retraces a little, then moves in that direction again.
Why does that happen ?
1. Natural supply / demand dynamics
The further price stretches up the less buyers join into the move. After some time whoever wants to buy already has bought. The others which have not yet will look for a retracement to buy again or to even short the move.Sellers will inevitably start testing the move. To see its strength at a point where they feel buying is at its weakest. As the sellers join the fight, buyers will see the upward momentum drop. Some will begin to sell out pushing momentum further down. The market makers who are moving the market the most will also reduce their buying pressure so they can save their capital to support the market after the retracement In order to ensure that there will be a higher swing low.
2. Manipulation by market makers.
"Saving their capital" sometimes generates whole trends, rather than just a small pullback. Long uptrends for long periods of times will eventually finally hit consistent supply above which MM will not be able to push further. At this point the big players will start dumping a large amount of their supply the market goes into a steep decline covering almost the entire distance of the uptrend before the big player starts to scoop up all the inventory at a low price and repeat the upside move again.
3. Shaking out weak hands
In order for a market to push higher. It needs to shake out the weak hands by engineering pullbacks. Weak hands will provide the necessary liquidity for the market maker to push the price higher.
4. Stops hunting. Market makers know perfectly well there will be traders moving up their stops up with the market. They will hunt them down. Sophisticated algos and trading programs will be used for this which further adds to the supply that causes retracements to occur.
If you enjoyed this information make sure to live a like!
Let me know in the comments what you think about it!
King
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