Forex Manipulation – Intro
Have you ever entered a forex trade that stopped you out before reversing into your intended take profit without you?
Unfortunately, this is extremely common amongst the retail trader crowd.
Unless you understand how the forex markets work, this will likely continue to happen until you get a margin call.
Why do stop hunts happen? And who are the players operating behind the curtains?
In this article, we will demystify the concept of forex manipulation. So you can stay on the right side of the market.
Forex Manipulation – How the Market Makers Work
Every trade in the FX markets must have a buyer and a seller. Each order is matched with a counterparty that takes the opposite side of the trade. If there is no willing counterparty, there is no trade. Simple as that!
Imagine a large UK corporation is looking to buy out a company in the US for $15 billion dollars. This corporation would have a currency broker or a large bank execute the conversion in the foreign exchange interbank market.
The broker’s job is to convert the corporation’s GBP sterling into US dollars and they earn a commission based on the average fill of the order so it is important to get the best price!
Due to the size of the transaction, the institutional trader cannot just dump it all at once as this will move the market and provide for massive slippage.
Instead, the trader will break the position down into multiple smaller lots (icebergs) and work the order by selling into buying pressure. This helps prevent other market participants from catching on to what is really going on.
What They Don’t Want You to Know
Market makers often force price into a level where there is a cluster of stop orders by manipulating smaller retail traders into entering the market in the wrong direction. The institutional trader(market maker) will look to complete their transaction once the desired price is reached. This will often happen on a failed breakout of prior highs or lows.
Once the supply hits the market, price reverses and starts to fall rapidly while all of the small retail traders that chased the breakout are now getting stopped out to the downside. This is what we call forex manipulation and it happens on a weekly basis in the FX market.
Now that we know why the forex market is manipulated, let’s take a look at an example and break down what happened.
Forex Manipulation – Case Study
(1) After an extended rally in the market, sellers step in and initiate a short pullback. Smart money bids the market back up into the previous highs to entice new retail longs into the market.
(2) Retail traders go long on the breakout only to see price reverse immediately. As the supply from the sell orders enters the market again at this level, the market rotates lower as late longs puke their positions.
(3) When the market trades below the previous support lows, existing longs get liquidated from before and traps the late breakout traders. This triggers a buy stop release back to the top of the range, where the institutional seller is waiting.
(4) The market trades back above the previous range highs and fails to sustain momentum. The institutional seller fills their remaining orders
(5) The resulting sell imbalances cause the market to sell off sharply and start trending lower.
Forex Manipulation – Conclusion
Stop hunts and manipulation happen on a daily basis and are the main reason why most forex traders are unsuccessful.
It takes time and practice to identify market manipulation and our Forex Price Action Video Series focuses on that!
I encourage you to check it out.
If you want to join us in our live trading room, check out the Day Trader package here >
If you prefer to trade more passively, check out our newsletter, trade ideas and live analysis in the Swing Trader package here >
The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.