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Libya in a deep trouble/Emergency Overnight ECB loans
Trader Dan
Monday, February 21, 2011
I posted a reply to some questions regarding this from some of the folks who had read my article on a Commercial Signal Failure but I suspect it got lost in the list.
I thought it best therefore to go ahead and post it up here to make it a bit easier for folks.
There are no limits on gold and silver trading as far as how much the price can move during any trading session.
The purpose of a price limit is to attempt to "cool down" a market that is either collapsing or soaring with the main idea being that it gives traders a chance to reflect a bit more on the news development or event that might have triggered a move of that extent. We traders tend to be a knee-jerk, reflexive type and will move quickly when something occurs that is either very bullish or very bearish. Sometimes, however, after we get a chance to think through the news development, we realize that we overreacted. That allows us to "correct" the price movement of the previous day and restore a bit more balance to a market. If not for this "cooling off" period, price might tend to make too much of an exaggerated move unnecessarily creating havoc among hedgers and some speculators.
However, when a news event, a crop forecast, a geopolitical development occurs that can affect a market, such as the grains for example, and this development greatly alters the supply/demand equilibrium, the markets can trade limit up or limit down several days in a row. When this happens, the exchanges typically have a set of rules that gradually increase the extent to which a price may move before it can no longer trade above or below that level during that session. This is to facilitate trade so that the market can actually function and allow some exiting of positions. A market that has too small of a price limit can and will lock limit bid or limit offer and simply will not trade at all.
A perfect example of this has been the cotton market which is in itself has been experiencing a type of commercial signal failure right now. It has been trading on expanded price limits quite often over the last few months.
Generally, once the price no longer locks limit bid or limit offer, and price begins to trade freely once again, the exchanges will then take another look at the contract and determine when to reduce the price limits as they attempt to bring them back towards the original defined move limit.
This lack of a daily price limit is also one of the reasons that speculators in the precious metals need to be careful. Those things can move a very long way and keep on going and if you are on the wrong side and do not employ good money management techniques, you can easily get wiped out in a hurry.
Watch out for complacency and overconfidence. They are killers!
Feb. 21, 2011
harveyorgan.blogspot.com/2011/02/libya-in-deep-troubleemergency.html