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Forex Market Maker Manipulation Explained – Think Like Smart Money!

February 18
09:31 2014

Updated 9/23/2019: Imagine if you had the ability to predict when the largest market participants were likely to step in and buy or sell the market! Do you think you could benefit from that type of information?

It goes without saying that this type of information would be hugely valuable to any trader as the largest market participants have the largest influence on the price action to follow.

Our job as traders then is to identify where smart money is likely to enter the market and position ourselves to take advantage of the move that ensues. The rest of this article will begin to explain the process of doing so.

Market Makers In A Nutshell

Market Makers are the big Daily Forex Bank Volumeboys in the industry controlling large sums of money on a daily basis as well as market liquidity. Market Makers are referred to as ‘Smart Money.’

Smart Money is:

  • Big Banks
  • Hedge Funds
  • Institutions

In the image to the right, you’ll see a breakdown of the 10 largest market participants by volume.

As you can see, just 10 market participants control/process over 60% of the daily forex volume!

Due to the massive position sizes they move and control, they consistently search for areas of liquidity! This demand for liquidity is the central reason manipulation exists.

Think of these traders as large ships or ocean tanks. Just like that large ship, their huge position sizes mean they cannot quickly change direction.

Retail traders are more akin to a speed boat. Our position sizing is small, and we can quickly adapt to current conditions, turning on a dime. That is also our advantage!

Liquidity Basics 101

For a trade to be completed, there needs to be a buyer and a seller present. If I want to sell 1 standard lot of the EURUSD @ 1.1200 someone must be willing to buy 1 standard lot from me @ 1.1200 for the transaction to take place.

Definition of ‘Liquidity’

The degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.

Liquidity allows Smart Money (market makers) to hide their buying or selling without dramatically spiking price, which would alert the entire market to their directional bias.

If the market sees institutional buying or selling everyone would simply jump on board, limiting the profit potential of the Market Makers dramatically!

Because of this, you will typically have some market manipulation prior to the trending move. How then can we spot this manipulation and more importantly, how can we profit from it?

Getting Caught In The Trap

It’s important to note that I’m NOT saying smart money targets retail traders, as they are only a tiny percentage of the daily forex market volume (6% last time I checked). I focus on how it affects retail traders not because they are the focus of smart money, but rather because that is who will be reading this article.

Unfortunately, retail traders all use what I term as reactive trading strategies. Reactive trading strategies, unlike those that are predictive, tend to get caught up in this short-term manipulation. 

To explain it another way, when the market moves up, most strategies create buy signals, and a move down creates sell signals. This is the core idea you’ll see in any strategy you’ve traded. Why is that a problem you ask?

This is a problem because smart money will often create or allow a rising market to occur, creating further buying pressure from the retail market they will sell into.

As the price turns down, all the traders they trapped long get stopped out only fueling the move to the downside further. The opposite would be true for a move up.

Below is a very short list of reactive trading strategies that work out just enough to make you think they actually work, while actually being a tool of Smart Money.

Don’t Follow The Herd – Be The Odd One Out

Roughly 3% of traders are consistently profitable. What this should tell you is that you need to be thinking differently than those around you.

If you’re trading 1 of the above strategies, or one that is clearly reactive and thus easily manipulation then you need to consider a change.

As you look for the best trading strategy to fit you personally, it is critical to keep in mind how the market makers actually move the market such as the forex bank trading strategy.

Learning to trade forex for a living is not an impossible task, but you cannot trade like the heard and expect different results.

If you’re interested in learning more about how we track and trade market manipulation you can check out our professional day trading course. As part of the course, the daily trading signals video breaks down live setups in real-time greatly speeding up the learning process.

Finally, if you have any questions after going through the article don’t hesitate to shoot us an email!