With the exception of a few long-term investors who may trade on a 100% cash basis, the overwhelming majority of Forex market participants are speculators. Because of this unusual duality of the Forex market (high leverage and almost universal use of stops), ‘stop hunting’ is a very common practice. Although it may have negative connotations to some readers, stop hunting is a legitimate form of trading. It is nothing more than the art of flushing the losing players out of the market. In Forex terms, they are known as ‘weak longs’ or ‘weak shorts.’ Much like a strong poker player who may take out less capable opponents by raising stakes and ‘buying the pot,’ large speculative players (like investment banks, hedge funds and money centre banks) like to gun stops in the hope of generating further directional momentum. In fact, the practice is so common in the Forex markets that any trader unaware of these price dynamics will probably suffer unnecessary losses. In trading currencies, market makers function as intermediaries in sales and purchases between two parties and two currencies. For example a bank will function as a market maker when it collects sellers of the US Dollar to then sell to investors who have Euros in exchange. The value of each currency is based on the current market value. To beat the Market Makers you need to understand the basic objectives of their activity. Overall, the Market Makers are traders and their objective is to make money.
The major difference between them and other traders is that they have the ability, through access to massive volumes, to move price at their will. So to make money, they aim to buy at a lower prices and then sell at higher prices. They achieve this by:
- Inducing traders to take positions
- Create panic and fear to induce traders to become emotional and think irrationally.
- Hit the Stops and Clear the Board.
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