Many traders new to the forex market tend to think that because the market is so huge – with trillions of dollars traded per day – that it cannot be easily manipulated.
Nevertheless, as any professional currency trader will tell you, the big forex market makers and brokers have a variety of tricks up their sleeves that usually make them money, often at the expense of their customers.
These manipulation techniques often seem to work especially well in markets thinned by holidays or when the major trading centers of New York, London and Tokyo are closed.
The following sections cover one of the more commonly seen types of forex market manipulation that involves taking out stop loss orders, usually in thin markets.
Taking Out Stops
One type of currency market manipulation is commonly known as taking out stops. This activity tends to require the ability to transact in large amounts, as well as fairly deep pockets, so it tends to be the domain of forex large market makers and speculators like major hedge funds.
For example, perhaps a large currency market maker is holding a substantial aggregate amount of stop loss orders at a particular level. Alternatively, maybe a very visible and easily recognized chart pattern has very probably led to the accumulation of stop loss orders by technical traders around a certain level in the market.
In either case, these situations result in a particular exchange rate level that, when traded, will probably result in a substantial move in the exchange rate for the relevant currency pair. This move would be driven by the execution of the large number of stop loss orders placed at that level.
Size Matters When Taking Out Stops
Furthermore, as the market approaches such a key stop level, it can provide an opportunity for big forex traders with enough muscle to move the market a bit.
Often, all they have to do is put enough pressure on the market to force it to move a few points further to trigger the large quantity of orders just waiting to be executed. They can then ride the resulting frenzy until it pans out and they can take their profits.
Example Involving Taking Out Stops
For example, consider the situation where a large quantity of buy stop orders have been placed in EUR/USD at 1.2500 and the market is currently trading just below that level at 1.2495.
A large trader knowing about the substantial accumulation of stops would simply keep buying Euros until they managed to get the 1.2500 level to trade. Doing this in a thin market would be especially effective.
Since stops are generally triggered by a particular level trading in the market, the large amount of pending orders would then force the market in EUR/USD even higher, perhaps up to 1.2525. As the stop-driven Euro buying frenzy wanes, the large trader would then take their profits by selling out their accumulated position.