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Overview: Today we will be talking about manipulation in the currency markets. We will talk about what is manipulation, how to identify manipulation, and how to put utilize this knowledge in your trading. (PS, the “natural” manipulation section is what you can here to read)
What is Manipulation?
In currency trading manipulation is widely accepted as the tactics in which market makers and larger institutional players do in order to stop you out of your positions and cause you to lose. I personally do not agree with this aspect of manipulation. First off, there are 2 different types of manipulation: a illegal version and a “natural” version.
Illegal Manipulation: this type of manipulation is TRUE manipulation, this is when banks (who are liquidity providers) use the data their customers give to them as means to create profits in the markets. These types of schemes range from something called “front running” which is when a bank will get a large order request from a client and expect said order to move the market. Rather than filling the client first, they will front run that position and put some of their own orders in the market for the same direction and then fill their clients and as their clients positions move the market higher they will then get out taking home both trading profits and commissions. This type of manipulation typically will give the customer a worse position.
Another type of manipulation is when traders at banks will take part in chat rooms with other banks, telling other bank traders the positions they have, the positions their clients have and where they want price to go. With all of this information it is very easy to take part in profitable moves as you know what all of the traders from different banks, hedge funds, and other institutions are doing or going to do. In a lawsuit filled on 16 large banks in the USA on this manner it was stated that these traders/groups took part in “manipulating FX prices, benchmarks, and bid/ask spreads, defendants restrained trade, decreased competition, and artificially increased prices, thereby injuring plaintiffs,”. This is real manipulation as it is intentionally abusing the information that these banks are entrusted with.
Some banks that have take part in this and are being sued include: Bank of America, Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Japan’s MUFG Bank, Royal Bank of Canada, Royal Bank of Scotland, Societe Generale, Standard Chartered and UBS. If you would like to read more about this law suit feel free to read here.
“Natural” Manipulation: Now for a more commonly know type of manipulation, “Natural” Manipulation. The reason i call this natural is because this is a type of manipulation that is viewed as abusive manipulation but in fact it is just natural movements in the markets that must occur in order for price to move. This is a type of “manipulation” that can be spotted and one can take advantage of. As we all know, the markets move from order to order depending on how many limit orders are on the bid or ask and how many market orders are being executed. Limit or “passive” orders can be stop losses, limit buys, or limit sells it doesn’t matter. Market orders are whenever you click “buy” on MT4 or what ever trading platform you use. A Market order is instantly executed at the nearly order price that has a limit order on it. With that being said, we can understand now why the market goes from zone to zone, because these market buyers or sellers are weighing down on the passive buyers and sellers which causes price to move until a equilibrium can be met. These equilibrium can be met at support or resistance zones.
So what makes this manipulation? Well as we approach these price ranges (support/ resistances) the market may not have enough orders directly in that zone in order to fill the need of the market. This will result in the market pushing price through these zones causing people to begin to get stopped out, or start selling, while this is happening the banks/institutions begin to take the opposite sides of these positions by buying peoples stop loss positions and buying peoples short positions. This will allow banks to begin accumulating orders and begin to shift the markets into a bullish manner and as price begins to shift into a bullish manner, the sellers will begin to have to close their stops due to heavy losses and the banks will gladly sell some of their positions back to them closing profits. This is a continuous cycle and happens all day every day. It happens on the 1h and the daily.
As you can see above, here is MANY MANY MANY examples of what this will look like throughout a few days/weeks. The market will continuously break different zones stopping people out/executing sell orders before reversing large amounts. This is what is happening to your positions when you say you got stopped out before it moved your way.
These types of moves even happen on daily time frames, but most of you most likely never even notice.
How to Avoid this?
The best and most effective way to take advantage of this and avoid it is to know. Know if there is news events coming out that may cause institutions to need to flush the market will sells before switching to buys, know how the different cycles of each day play out, and know how to identify market structure/trends. Trends don’t last for ever and it is VERY typical to see a clear manipulation play right at the end of a nice long trend. Why? Because for the market to flush out large amounts of sellers, they must first have price drop before starting the uptrend.
Above is the same, market moves above or below zones before executing LARGE moves. As you can see, these moves always happen in NY and London, but a lot of these fake outs/manipulations ALSO happen during different NY and London sessions. The point here is that you must understand which type of day it is. Is it a slow large move type of day? if so, do you see any signs of prior 1-2 day manipulation moves? If it is a slow day do you see any potential manipulation moves happening?
To conclude, there are 2 types of manipulation 1 in which is blatantly illegal and the other in which is a necessary function of the markets in order for it to create enough orders for it to move. Yes, i am sure that some of these manipulation moves are associated with each other as these large bank manipulations will take advantage of this. All in all, in order to take advantage of these manipulation events, you must be aware of all that is happening in the markets and be able to identity your zones and how price is reactive in and past your zones. I hope this all helped and happy trading! Feel free to reach out and ask questions if you have any!