The concept of Critical Mass is one of the Seven Pillars of Decision Point trading. I had written an earlier post on this concept earlier.Read it here, just to refresh your memory.
The concept is very valid on Futures market. As there are no delivery based trades, every position can be cancelled only by executing an order against our own position. In other words every position guarantees a future order in the opposite direction.
For the purpose of analysis, we assume there are two types of traders in the market, Day Traders and Positional Traders. The concept is applicable to both the groups, but we are more concerned about the Day Trading brigade.
Market is a place where countless people execute different strategies at the same time. They have their own methods and tactics to enter and exit. Everybody is attempting to capture a directional move and more people joining the move means more people need to exit on reversal.
Please do refer to the above picture. Price is moving down. People are shorting different signals such as Swing point break, MA break, Fibo levels etc. Finally price hits a demand area and start moving up. As it moves up, earlier shorts start exiting on their signals and create a lot of buy orders on the way up. Momentum traders also join and fuel the up move. DP traders enter early on the BOF to take advantage of Critical Mass exiting
Look at the second part of the picture. In situation A, Price gaps up and nobody was able to participate in the up move. Critical Mass will not help you on the reversal. Situation B is a vertical move. Very few could take a long position. Situation C is a gradual up move with orderly pull back and might have attracted a lot of longs. The possibility of a reversal is higher in situation C
In case of a reversal, Move from A an B can be faster due to the Fluid created. Fluid moves happen not because of Critical Mass selling but lack of buying on the way down.Do not skip a trade into a fluid thinking about Critical Mass. Moves can happen even if Critical Mass is not trapped.
The concept is applicable for Positional Trades also. When price reverses after a multi day move, it can trigger a fast and furious move in the opposite direction. A Counter trend outside gap is an example of Positional Traders getting trapped
Hope I could convey the idea clearly. Please feel free to ask if you have any doubts.