Market manipulation can be one of the reasons why traders fail in forex trading. Learn how it works and how to avoid it in this article.

Understanding Forex Manipulation Strategy

Forex trading offers potential profit but also carries a risk of losing money. Traders should be aware that losses can be caused by factors beyond their strategy or skills, such as market manipulation. Market manipulation adds stress to trading and highlights the importance of improving skills, understanding the market, and recognizing those who seek to exploit it.

Traders should be mindful of different forms of market manipulation and focus on developing knowledge and skills to protect themselves. Understanding forex manipulation strategies provides a significant advantage over those who overlook or disregard this aspect.

 

Forex Market Manipulation and How it Works

Forex market manipulation refers to the attempt to influence the behavior of other players into a certain action, which may result in the loss of their capital. It is an attempt to affect the price and supply and demand for a certain financial product, particularly currency pairs.

The manipulator basically tries to control the market by pushing the price in a favorable direction for them and leaving others with losing positions.

In the forex market, a trade can take place only if there's a buyer and a seller. So each position should be matched with a counterparty that takes the opposite side of the trade.

Simply put, if there's no matching counterparty, the trade won't happen at all. Now the catch is that there's no way of telling who is going to take the other side of the trade. We simply don't know who we are dealing with.

It could be another retail trader, but it can also be a big player such as major banks, hedge funds, and institutional traders. These big players might take advantage and lead you to their bait, making you lose the trade.

 

Understanding the Stop Hunt Strategy

Big market players can manipulate the market in various ways, one of them is called the Stop Hunt strategy. Basically, stop loss hunting occurs when a trader opens a position and sets the stop loss level.

A while later, the price moves directly into the trader's stop loss level, kicking him out of the trade. Then almost immediately afterward, the price reverses back and moves in the trader's intended direction.

Anyone who has experienced this can definitely testify about how frustrating this can be when it happens. And the worst thing is that this scenario is not a one-time event, but it's actually pretty common in the forex market.

As a result, many traders would be kicked out of the trade early multiple times, not knowing what they did wrong or whether they just had extremely bad luck that day. Meanwhile, the truth is that they simply fell into the traps set up by bigger market players who have more control over the market.

Imagine this scenario. A UK company wants to convert 10 billion GBP to US dollars. In order to do so, they need the help of a currency broker that would convert your money in the forex market.
The broker will get a commission based on the average fill of the order, so it's important for them to get the smallest slippage possible.
Now since the transaction size is very large, the broker can't just put it all out at once because then it will push the price lower and create a massive slippage.

So what do they do?

First, they divide the position into smaller lots (icebergs) and use it to manipulate the market. They would steer the price to the level where there's a group of stop orders by retail traders.

If they are able to do so and trigger all of the stop orders, there will be a flood of buy orders in the market because traders who are long will exit their positions.

This gives the broker a better entry price, so when the desired price is reached, they would enter the market and complete the conversion. Once it's done, the price reverses and starts to fall drastically.

In short, if a big player wants to long the market with minimal slippages, they tend to place a sell order to trigger nearby stop losses. This allows them to buy from traders who cut their losses and then enter the market at a more favorable entry price.

 

How to Avoid Forex Market Manipulation

Understanding how the forex market is manipulated can help you to avoid getting caught in the trap. If you're worried about being fooled by giant players in the market, you need to be able to see the signals and use a good risk management strategy. 

Even better, once you're able to spot the stop hunting pattern on the price chart, you can then join Smart Money and actually take advantage of the situation. If you can do that, you will no longer feel worried about being manipulated anymore. 

You can start by putting yourself in the shoes of large institutions and big-money players. Typically, they would search for liquidity in order to complete their desired positions in the market.

They would mostly target small money players and work around the predictable spots for support and resistance levels, so similarly, we should also keep an eye on these levels.

Furthermore, it's important to manage your stop loss accordingly. This can be tricky because as traders we know that stop loss is one of the best protection tools for our trades, yet it can also be the reason for our failures when it comes to stop hunting phenomena.

There are at least three tips to consider when placing your stop loss in order to avoid getting stopped hunted, namely:

  • Don't place your stop loss directly at or below Support or above the Resistance level.
  • Don't place your stop loss too far from your entry point.
  • Place your stop loss at a level where it invalidates your trading setup.

 

The Consequences of Forex Manipulation

Market manipulation may create an unfair trading ground and destabilize the market if it goes uncontrolled. This may also result in fewer people willing to invest in the market because they knew they were likely to be taken advantage of.

Regardless of what method is used, retail traders are the ones who tend to get hurt the most. The giant players are able to make a huge profit because many retail traders do not realize the real scenario and just fall straight into the trap.

However, as a trader, we must understand that blaming the market won't bring any success to your trade. In fact, the outcome of your trade depends on your performance and how you handle various situations in the market.

Apart from that, it's also worth mentioning that market manipulation is somewhat natural for big market players. If we dig deeper into the concept of market liquidity in financial markets, it's clear that, unlike retail traders who mostly trade with relatively small size positions, larger market players tend to rely on the market liquidity to efficiently get in and out of the market in order to make a profit.

After all, they do have the power to control the market in a way and move the price in the direction that they intended. Big players usually understand the typical behavior of retail traders and then take advantage of it. This is what is often seen as market manipulation. Most retail traders and beginners usually don't realize that they're being steered by bigger market participants, so they end up losing the trade.

 

The Bottom Line

From the explanation above, we can see that market manipulation can be highly unfavorable for retail traders and it occurs rather frequently in the forex market.

However, it is not wise to just do nothing and accept that you're going to lose money when it happens. This is why it's very crucial for traders to learn how to spot the patterns and be able to avoid the scenario.

If we put it in a bigger perspective, we can even see that market manipulation is actually just a liquidity run initiated by market players in an attempt to get their orders filled. This is probably what you should be focusing more on, instead of just putting full blame on the forex broker or institutional traders.

So in the end, we want to ensure that we are not falling victim to these setups, but at the same time, we should also take responsibility for our actions in the market.  

As the trading industry is actually a dangerous place if you come unarmed, aside from market manipulation, you should also be careful of the trap of money game from forex brokers.