Who is the market maker?
The market maker or 'liquidity provider' is an entity (which can be an institution or an individual) that provides liquidity in financial markets by quoting buy and sell prices for specific assets, aiming to reduce the gap between supply and demand. The market maker profits from the difference between the selling price and the buying price (the spread).
But behind this fundamental role, market makers use smart strategies that directly affect price movements and may be misunderstood by ordinary traders. Understanding these strategies gives you a significant competitive advantage.
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The main strategies of market makers in trading:
1. Liquidity Hunting:
The market maker intentionally moves the price to areas where there are many stop-loss orders. Its goal is to trigger those orders to gain liquidity that allows it to execute its large trades smoothly.
Example: If it knows there are many stop-loss orders below a certain support level, it may push the price to break the support, then immediately bring it back after gathering liquidity.
2. Price Traps (Fakeouts):
The market maker creates a false breakout of a resistance or support area to mislead traders into believing a new trend is starting, then quickly reverses the price.
Its goal: To induce false trades from traders to gather liquidity before reversing the trend.
3. Accumulation/Distribution:
Accumulation: Occurs in low price areas when the market maker gradually buys without raising the price.
Distribution: Occurs in high price areas when it starts selling gradually without clearly lowering the price.
These phases typically show sideways price movement.
4. 'Killer Reversal' Strategy (Stop Hunt Reversal):
It drives the price to break support or resistance to trigger stop-loss orders, then quickly reverses it, causing many traders to exit with losses.
5. Manipulation of Spread and Time:
It may suddenly widen the spread during news or in times of low liquidity to easily trigger stop-loss orders.
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How do you protect yourself from market maker strategies?
Do not enter with the first breakout; wait for confirmation of the move.
Avoid placing stop-loss orders in obvious places (directly above peaks or below troughs).
Watch the volume during breakouts – a sudden increase may indicate a trap.
Learn to read price behavior (Price Action) and Wyckoff phases to understand where accumulation or distribution occurs.
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Summary
Success in the market requires not only understanding technical or fundamental analysis but, more importantly, understanding the behavior of the market maker that often controls price movements. The more you understand its strategies, the greater your chances of avoiding its traps and riding the wave instead of falling victim to it.