Market Makers and Their Role in Forex Trading

A trader first consciously faces a market maker in a rather banal situation. After having had several losing trades for the first time and diving into the Internet in search of a reason, they find an explanation for all their failures. It turns out that in the market there is a great and dreadful monster which pulls up the price to its stop-loss that the trader has calculated so correctly and set with such a margin of safety.

Who is this monster? Is it true that it is so omnipotent? How do we keep peace with it, and is it possible to earn with its help?

Forex Market Maker Manipulation

Is it true that the Forex market is manipulated by a lot of banks and market makers? If so, how can we know when they manipulate the Forex markets, and is it something that requires sophisticated tools?

Firstly, it is true that the Forex markets are manipulated. While you don’t need cosmopolitan tools or secret contacts to know how this happens, figuring out when it happens is not easy for the majority of retail traders.

Every trade that is completed in the Forex markets needs to have a buyer and seller. This usually happens in a fraction of a second electronically, but in essence, each time you start a buy trade, you are paired with someone who is entering a sell position and taking the opposite side of your trade. If this does not happen, there would not be a trade.

Large banks face problems small traders do not. Any retail trader can place whatever position size they wish into the market without ever fearing slippage or bad fill. However, for large institutions, placing huge orders without disrupting the market requires more strategic actions, such as buying into selling pressure or selling into buying pressure, to push the price to a desired level.

What Is a Market Maker?

Behind the mask of this "main enemy" is one of the market participants: the market maker. Unlike ordinary exchange speculators, who earn from the difference in price when buying and selling trading instruments, the market maker solves a more global task — providing market liquidity. They act as the second party to the trade in the absence of another counterparty.

A market maker ensures trades occur smoothly by balancing buy and sell orders. Their work involves sophisticated hedging systems, such as option strategies, and they earn primarily through the spread — the difference between the buying and selling price.

For instance, if a large European conglomerate wants to purchase a U.S. company for $10 billion, they cannot simply go to a bank to exchange the money. Instead, they approach a currency broker or a large bank, which acts as the market maker to facilitate the transaction.

How to Trade Like a Market Maker

To profit from market maker activities, traders must think like them. Market makers focus on areas where traders’ money is concentrated and use this information to their advantage.

Market makers often concentrate on levels where high volumes of orders are placed, such as support or resistance levels. By pushing prices to these levels, they trigger stop orders from both buyers and sellers, creating opportunities for their transactions to profit.

To develop a strategy based on market makers’ actions:

Focus on areas of increased interest where traders’ orders are likely concentrated.

Use trading volume data to analyze potential price movements.

Understand that market makers work to balance trades and often stand on the opposite side of a retail trader’s position.

Trading Strategy Based on Liquidity Providers’ Preferences

Market makers play a vital role in modern financial markets by providing liquidity and preventing manipulative price movements. However, they cannot completely shield Forex markets from risks like flash crashes, which have impacted currencies like the Japanese yen and Swiss franc in recent years.

Market makers profit from the spread between buying and selling prices. During periods of low trading volumes and consolidation, market makers are less satisfied. Conversely, when prices break through key levels where stop orders are placed, liquidity providers benefit from increased activity.

To leverage this information, traders should:

Identify periods of weak market activity, such as narrow trading ranges with low volumes.

Monitor trading volume behavior during breakouts or near significant levels.

Aim for short-term profits rather than overly ambitious targets.

For example, if GBP/USD traded inactively during the American and Asian sessions, a market maker might push prices toward selling to generate activity. In this case, traders could place a protective stop order just above the consolidation range, aiming for modest profit targets.

Conclusion

Market makers are essential players in financial markets, ensuring liquidity and facilitating trades. While they often stand on the opposite side of a retail trader’s position, understanding their strategies and motivations can help traders develop effective trading strategies.

By analyzing trading volumes, price ranges, and market conditions, traders can anticipate market maker activities and use them to their advantage. However, it is essential to combine this approach with sound risk management and other analytical tools for consistent success.