A sell-off is a situation in which many traders sell their holdings of an asset suddenly, often (but not always) due to bad or unexpected news.
It is described as a short period of intense selling triggered by declining prices.
Sell-offs, is also called “dumping” because traders are typically trying to dispose of their holding as fast as possible rather than as normal trade.
This surge in selling volume cause prices to plummet even more sharply.
It is the accelerated selling of assets, such as stocks, bonds, commodities, and currencies, beyond the daily ebb and flow of market prices.
This term generally refers to a short- or intermediate-term price decline rather than an extended period of falling prices.
Although sell-offs may be dramatic and raise your heart rate, they are generally short-lived declines that stabilize or reverse themselves relatively quickly.
The unexpected has and will always be a key contributor to sell-offs.
Such surprises can be difficult to predict, but knowing how to handle it when they do occur is critical.
How Sell-Offs Work
Sell-offs occur based on the principle of supply and demand.
If a large number of traders decide to sell their holdings and there is not an equivalent increase in buyers, the price will fall.
Supply outnumbers demand in this case.
Sell-offs are a reflection of market psychology.
For example, if a sell-off occurs in AUD/USD after an unexpectedly dovish statement by the RBA, its central bank, this means that forex traders who were long AUD/USD decided to exit their positions as quickly as possible since their bullish view on AUD has now been shattered.
For contrarian traders, sell-offs can present an opportunity to buy at low prices. If traders believe that the sell-off was unjustified or an extreme reaction, they might take the opportunity and buy at a “bargain” price.