Never make the first move unless you’re a good-looking dude or gal attempting to win over his or her crush.
This means you shouldn’t always get in when you see the market moving so swiftly.
Dealers understand that markets fluctuate around 80% of the time.
This means that rapid and sharp movements are more likely to be faded. This is an excellent opportunity for traders to earn.
First and foremost, why will it most likely fade?
Remember, dealers work for banks, so they have two “advantages” (more like tricks, in our opinion!) in their sleeves.
They can first see the orders that retail traders have and desire to fill.
Second, they have a lot of cash to back them up and move the market.
Let’s look at a chart to understand how dealers can benefit from these methods.
A 5-minute EUR/USD chart is shown below. The German ZEW economic sentiment index, a high-impact report, has just been released, as seen above.
Retail traders examine their charts and notice that the EUR/USD is falling, so they decide to participate.
“It’s looking pretty good,” they think. In the last 5 minutes, the EUR/USD has plummeted 20 pips!
This will most likely continue to decline and test the daily low!”
But wait a minute, that’s exactly what the average retail dealer is thinking. What are traders concentrating on?
Dealers understand that the publication of data typically results in price spikes as traders trade in and out swiftly.
They also understand that most of the time, the first move following a news event is a fakeout, and that price usually REVERSES to levels prior to the release of the data.
What happens is that dealers, with the financial backing of their respective banks and hedge funds, will take on the opposite position and fade the move.
And since their collective efforts (cough… money…) outnumber those of us retail traders, our positions get stomped on like little, little ants.
In the chart above, we see that the down move wasn’t sustained. The dealers’ position is now pushing the price up to the point where.
…and then the price changes! And this is where the magic takes place!
Most traders’ stops were most likely put around over 1.2900.
To hit certain stops, dealers most likely placed more long bets with their own money, pushing the price up to those levels (we’ll explain this in more detail later).
When retail traders noticed that the price was setting a new daily high, they presumably believed to themselves, “Oh man, this baby is going to keep trading higher!” I must purchase, buy, buy!!! “*click, click*.”
Now that retail traders have changed their minds and want to buy EUR/USD, dealers can take advantage once more and terminate their previous long positions while profiting from the spread! Oh, yes!
Of course, the genuine market players are the dealers, banks, and trading institutions!
That is why they are referred to as market makers: they affect the market!
Once all of those retail traders enter long positions and place their stop orders below the 1.2900 resistance level, dealers can make a dash for those stops and profit from the spread!
Will you take a look at that? Price did trade somewhat higher at first, but then it faded and dropped down under the 1.2900 handle.
All of the retail traders who decided to go long on the break in search of new highs most likely had their stop losses hit.
As it turned out, the 1.2900 resistance held for the remainder of the day.
You can watch how dealers exploit their significant edge to shift markets in their favor!
This is why you shouldn’t always make the initial move since you can get caught in a fakeout.