The Market Makers [PDF]

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The Market Makers

What Is A Market Maker?

By definition,

A market maker is a "market participant" or member firm of an exchange that also buys and sells securities at prices it displays in an exchange’s trading system for its own account which are called principal trades and for customer accounts which are called agency trades. Using these systems, a market maker can enter and adjust quotes to buy or sell, enter, and execute orders, and clear those orders. Market makers exist under rules created by exchanges approved by a securities regulator. In the U.S., the Securities and Exchange Commission is the main regulator of the exchanges. Market maker rights and responsibilities vary by exchange, and the market within an exchange such as equities or options. Most foreign exchange trading firms are market makers and so are many banks. The market maker both sells to and also buys from its clients and is compensated by means of price differentials for the service of providing liquidity, reducing transaction costs and facilitating trade. In short, market makers create the liquidity in the forex market. If we want to buy or sell a currency, the market makers sell or buy to us and pickup the opposite side of the order.

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Retail Traders VS Market Makers

To beat the Market Makers you need to understand the objectives of their activity. Overall, the Market Makers are traders and their objective is to make money just like us. This includes strategies to trade against retail traders. The major difference between Market Makers and retail 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 price and then sell at a higher price. They achieve this by:

1. Inducing traders to take positions.

This is achieved by using a range of price movements to ‘trick’ traders into taking a position in a given direction but then reversing it again. This means that the Market Makers can sell a specific currency at a certain price and then buy it back at a lower price when the retail trader feels too much pain from the currency value moving backward and wanting to sell it back again (e.g. via the stop loss) 2. Create panic and fear to induce traders to become emotional and think irrationally.

This often involves: ⋅ quick moves ⋅ spike candles ⋅ news releases ⋅ ‘inexplicable’ price behaviour. 3. Hit the Stops and Clear the Board.

This forces traders into ‘margin trouble’ and ultimately out of the game. Our goal is to trade alongside the Market Makers and ride their wave. In this section you will learn how to trade alongside the Market Makers and use their setups to enter high probability trades instead of being trapped like most retail traders.

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Market Maker Rules

Before we get into learning ORDER BLOCKS and BREAKER BLOCKS (the high probably trade concept that this section is focused around), we must stand by a few rules when trading these concepts. •

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Not every setup is a true Market Maker Setup. You must know and understand the CONTEXT behind the setups in order to properly identify a real valid Market Maker setup. ALWAYS know the overall price directional bias ONLY takes trades in the direction of the overall trend Not every up candle which is then traded down through or down candle which is then traded up through is an Order Block. Never force a setup. Always look for liquidity first. Identify the higher time frame liquidity. Understand that the marker moves with INTENTION, price is not just random. To the left of current price is technicals, to the right of price is fundamentals and Market Makers. Technical's are just added confirmations and confluence for our setups. Price will do whatever it wants. Never risk more then 3% of your account on a trade Always use proper risk to reward ratios, 1:2 minimum.

Context The context behind each setup is the most important part. Just because there is a big move, fake out, or “stop hunt” does not make it a valid Market Maker setup. We want to see setups form at major retail support and resistance levels, institutional levels, equilibrium levels, and any major areas where retail traders are taught to buy or sell. For example, double tops and double bottoms. We also want to see price taking out Equal Lows or Equal Highs to pickup Liquidity during each setup. Also the setup must align with the markets overall directional bias.

Sniper Entry And Sniper Killshot Zones are more valid when they are at Institutional Levels.

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Intention

Price ALWAYS moves with intention. Market Makers move price to areas with a lot of liquidity. Major obvious technical levels have the most liquidity around them. For example, a big Double Top on the daily time frame, every retail trader can see this big “M” forming and decide to short with stop losses above the previous high. Retail traders also place buy stops above the previous high with the intention that if price does break the high it will continue up. Market Markers will take out the high hitting the stop losses and triggering buy stops, picking up the liquidity, then move the market the intended direction. We will go over this with examples in the next pages.

How many times have you been stopped out then price goes your way? How many times have your buy stops or sell stops been triggered and then price moves aggressively the other way? If this is happening to you it is because you have identified the major areas but have yet to learn how the Market Makers work around these key levels to pickup liquidity.

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Market Liquidity

Where is the liquidity in the market? If you don’t know the answer to this question, then you will have trouble finding what the market is likely to do and where the market it is likely going. Although some retail traders place sell stops under single lows and buy stops above single highs, this is not where our focus will be. Yes there is liquidity around the single lows and highs but when we see EQUAL LOWS and EQUAL HIGHS, this is where a majority of retail traders have pending orders or stop losses. Retail traders see equal lows as support and a double bottom so buy and see equal highs as a resistance and a double top and sell. All retail traders are taught to trade this way and can see this in the market. This means that there is a lot of liquidity around these setups and the Market Makers target them to trap retail traders and pickup the liquidity.

Buy and Sell Side Liquidity: Buy and sell side liquidity are areas of price in which buy stops and or sell stops are mostly residing. If you can understand the higher time frame perspectives and see where the "money" is, then you have a bias once you see price moving off known areas of support or resistance. Price will seek the liquidity in order to either reverse or continue in within it's expansion move. If we see price as reversing at the buy or sell side of liquidity, then we trade the developed price action, if we see price continue to move through the buy or sell side liquidity, then we stick to the order flow of price and trade the buy or sell side that it is, towards the next price objectives.

Liquidity Pool: Liquidity pools or resting liquidity, is an established level in the market where stops and orders can be resting, leaving these areas exposed for smart money to hunt these areas taking stop losses and triggering new buy and sell orders into the market. Buy stops and sell stops are sources of liquidity above and below short term and long term highs and lows. Liquidity can also be engineered by smart money knowing they will trigger these levels at a future time in price, crouching the "true value" of the currency pair.

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Examples of Market Makers Grabbing Liquidity: As you can see in the example below, price is making a double top at a resistance. Retail traders see this as a sign to short, which in fact is true in most cases, however, a majority of the retail traders enter the market too early. Price takes out the Equal Highs triggering the stop losses on early sellers and most importantly triggers the buy stops to pickup liquidity, then moves the intended direction.

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As you can see in the example below, price is making a double bottom at a support. Retail traders see this as a sign to buy, which in fact is true in most cases, however, a majority of the retail traders enter the market too early just like on the double top. Price takes out the Equal Lows triggering the stop losses on early buyers and most importantly triggers the sell stops to pickup liquidity, then moves the intended direction.

Now think about it, how many times have you been trapped or took a loss from a setup similar to these two examples shown? It happens to retail traders over and over again because they do not understand the reasoning behind the setups. Most retail traders are just taught to buy a double bottom and to sell a double top. Now that you understand these patterns and how market makers use them, you will be able to see these manipulated moves occur and then enter the market after the manipulation is completed and you have confirmations to enter the market.

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Sniper Zones

The backbone of the SNIPER ZONE idea mirrors very closely the concept of standard support and resistance. A Bullish SNIPER ZONE is created by a down move that precedes an up move that resumes the trend, makes new highs, and/or breaks market structure. This signifies a move by larger/institutional sized market participants in which price is driven lower to not only shake out participants, but also to buy the currency at a lower price as well. This zone is then protected by the institutional players the next time the market moves back to that range, as it is their goal to sell at a higher price than they bought at that level. We want to highlight this down move by drawing a horizontal box from the top of the candle body to the bottom, then placing a horizontal ray across the chart to indicate the price levels visually, allowing us to prepare to act accordingly when price moves back into the price level. These SNIPER ZONES can be drawn on all time frames and even overlap to indicate confluence of levels. As always, the higher the time frame, the stronger the signal. As price continues to come back to these levels, they lose strength, this is because the powers that be who are “protecting” these levels lose interest or the capital needed to prevent price from dropping below the SNIPER ZONE. Similar to when support flips to resistance, the bullish SNIPER ZONE will then act as resistance when price breaks below it. Bearish SNIPER ZONE, is highlighted the same way, but instead of a down move preceding an up move, a bearish SNIPER ZONE is created by an up move before a down-move which resumes the downtrend, makes new lows and/or breaks market structure. These levels are created by institutional short sellers, who will bring the price up to create liquidity from breakout/FOMO buyers and stop losses from shorts, so that they can sell at a higher price with the necessary volume.

The next time price returns back to this level, it is in their best interest to protect this level and send price back lower to keep their shorts in profit. Trading the SNIPER ZONE is very simple. When the trend is bullish, place orders at the bullish SNIPER ZONE, with the larger orders lying at the bottom of the SNIPER ZONE (lowest price) and stop losses just below the SNIPER ZONE. Bearish SNIPER ZONES are traded the same way just opposite. When the trend is bearish, place orders at the bearish SNIPER ZONE, with the larger orders lying at the top of the SNIPER ZONE (highest price) and stop losses just above the SNIPER ZONE.

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Mitigation When the banks establish their price structure and or ranges within any currency pair, the future order flow is based on certain levels of the preceding trading range. Sometimes critical levels can be over shot due to orders being to strong and or cap levels not being maintained. When price dives deep or sells off into a substantial low breaking previous lows with out reacting or bouncing after the liquidity was targeted, this one time creates thin liquidity normally resulting in a sharp counter move back to the original point of origin. However if the market makers display interest in the new re pricing range, they may just mitigate their loss or re structure the loss and wind off those previous longs at the point where the liquidity was tapped into below the previous lows. Hence mitigation comes into the market forcing price back down from the breaking level using the breaker block zone as resistance.

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Sniper Killshot Zone

SNIPER KILLSHOTS are similar to stop hunts, banks buy into a bearish candle to takeout highs and grab liquidity or sell into a bullish candle to take out lows and grab liquidity. Price then reverses quickly in the opposite direction. Once price pulls back into the Sniper Killshot Zone the market makers mitigate the order used to run the highs or lows, this is when we focus on entry levels at the Sniper Killshot Zone. The highlighted bear candle is the candle banks bought into to run the equal highs. Price then traded back below the Sniper Killshot Zone, banks then exit their longs used to run the highs and add shorts to drive price lower.

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What Is Equilibrium?

Equilibrium Of Consolidation:

Consolidation is a technical analysis term referring to prices trading within a range and is generally interpreted as market indecisiveness. When we see price consolidating, we can draw use the Fibonacci tool and draw the fibs from the high to the low of the consolidation. The 50% Fibonacci level will identify the equilibrium of the consolidation. This is a major area of interest and price usually will make big moves off of it. The major thing we are waiting and watching for is for price to reject the equilibrium before a major breakout. In the example below you can see how major the equilibrium level was and how price reacted off of it.

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