The purpose of a washout is to drive retail investors out of the market by creating panic and anxiety, which is achieved through carefully designed strategies by the main players. Despite the large number of retail investors, the skills of the market makers often succeed in washing away most of them, even causing retail investors to exit the market unknowingly. Below are the three main washout tactics commonly used by market makers:
1. "Grinding" — Long-term volatility to suppress emotions
The main players often use the tactic of "grinding" to repeatedly test the market bottom, extending the time without allowing the price to rise. The price may rise by $1 and then fall by $2, creating a continuously fluctuating situation. Prolonged volatility can lead to emotional fluctuations among retail investors, and those lacking patience may be forced out during this process, clearing the selling pressure from the market for the main players.
2. "Pitfall" — Rapid decline to create panic
When the "grinding" tactic is still insufficient to wash out retail investors, the main players will use the strategy of "pitfall." They create a situation of rapid and significant volume decline, resulting in a breakdown, making it so that the price drops without a clear bottom, causing retail investors to feel fear and confusion about when the market will stop falling. In this case, many retail investors may choose to cut their losses, allowing the main players to smoothly absorb more low-priced chips.
The core of these tactics lies in suppressing the emotions of retail investors, creating unease and panic, thereby achieving the operational plans of the main players. For retail investors, staying calm and patient is key to dealing with washouts.