⭐️How do market makers trade?
Market makers are entities or financial companies that provide liquidity in financial markets by continuously quoting buy and sell prices (Bid/Ask), and they represent a very important part of exchanges' operations. Here’s the method they usually use in trading:
1. Providing liquidity
The market maker always offers a buy and sell price for a specific asset (like a stock, currency pair, or futures contract), thus ensuring the presence of a counterparty for any buying or selling transaction from traders.
Example:
They buy the stock at $99.95 (Bid)
They sell it at $100.05 (Ask) The difference between the two prices is called the spread, which is an immediate profit for the market maker.
2. Profit from the spread
The main profit for market makers comes from this difference in prices between buying and selling. The more the volume of trades increases, the more their profits from the spread.
3. Balance between supply and demand
If the market maker notices that the demand for buying is increasing, they may gradually raise the selling price to achieve balance or reduce risks. The goal is not to get involved in an unbalanced position (like holding a large number of shares without buyers).
4. Use of fast trading algorithms and mechanisms
Market makers use automated systems and advanced algorithms to analyze the market and adjust prices in fractions of a second, which is known as High-Frequency Trading.
5. Risk Hedging
When a market maker buys an asset to meet a client's sell order, they may buy derivative contracts (like options or futures) to protect themselves from price fluctuations.
Do market makers control the market?
Some traders believe that market makers 'manipulate' prices to get traders out of their positions, especially when moving the market suddenly, but in reality, most market makers operate under strict regulations, and their main goal is to profit from the spread, not to speculate on market direction.
The individual trader must recognize the movements of the market maker to avoid falling into their 'trap'.
First: Signs indicating market maker intervention
1. A sudden and rapid movement in price
Suddenly you see a large bullish or bearish candle without news or a clear reason.
The goal may be to stop loss hunting.
2. Long Wicks
The appearance of candles with long wicks upwards or downwards, then the price quickly returns to its place.
It may indicate the liquidation of traders' positions (getting them out of the market).
3. False Breakout
The price breaks a clear resistance or support and then quickly returns inside.
This is very common as a trap for traders who rely on breakouts.
Secondly: How to avoid market maker traps?
1. Avoid entering at well-known psychological levels directly.
Like round numbers (100, 1.2000...) which are often targets for stop losses.
2. Avoid entering with the first breakout.
Wait for a retest to confirm the breakout, as the market maker may push the price above resistance and then bring it back down.
3. Watch the Volume
If the volume rises suddenly with a rapid movement and then the price returns to its place, it may be a market maker's move to accumulate or distribute positions.
4. Use of Supply & Demand areas
Market makers often enter at these areas, and not necessarily at regular support and resistance lines.
5. Follow the pattern candles (like Pin Bar, Engulfing...) in important areas
These candles give you signals that there is a rejection of the price, which may be a move by the market maker.
A simple example:
Imagine there is clear resistance at 1.2000, and many traders placed buy orders after the breakout. The market maker pushes the price to 1.2010 (above resistance), activates the buy orders, then sells to them, and then quickly brings the price back to 1.1950. In this way, they have:
Taking liquidity from buyers.
Activating stop loss orders for sellers.
And profit from the difference.
Here’s a general scenario that works on any currency and any timeframe (like 15 minutes or 1 hour, for example), and the idea will apply to most markets.
The scenario I will draw is:
"False breakout above resistance - Buy trap"
The price approaches a clear resistance area.
Market makers push the price above resistance.
Traders enter buy (Breakout buyers).
Market makers sell to them, then bring the price back down.
Stop loss orders are activated.
Market makers buy again at lower prices = double profit.