THE MARKET MAKER TRADING CYCLE

The Market Maker Trading Cycle

The Market Makers business model has several key phases. We call these phases the Market Maker Cycle.

So what does a typical week look like?

The week starts with the first trap move (see Beware Of The Market Makers Traps below) on a Sunday night or early Monday morning.

This is followed by the accumulation phase and the setting up of an initial high and an initial low.

You will see this phase in the Asian session, and you will see the price held in a narrow range of 25-30 pips.

The accumulation phase is then often followed by a spring or stop hunt. A spring or stop hunt is a move against the real intentions of the Market Makers.

The Market Makers then initiate the actual planned market move. This results in the formation of a trend that can be slow and steady, or it could be swift and furious. A trend can be just a few hours, and it can be up to 8 or 10 hours.

Viewed on the chart, the trend will be seen as a series of drives or pushes in the direction that the Market Makers want to move the price.

Towards the end of the day or the end of the session, there will be a corrective pattern of some type (wedge/pennant/head and shoulders/M or W formation). The price will pull back from the high or the low.

This is the markdown phase.

The price will attempt to pull back toward the mid-range and into a slow, choppy consolidation phase.

This process of Induce – Trap – Shift is repeated by the Market Makers.

Viewed on the weekly chart, the trend created by the Market Makers, as part of the cycle, can last for 3/4/5 days before reversing.

If Only It Was That Straight Forward

The reversal or markdown phase don’t always happen at the same time and on the same day. The Market Makers mix it up.

They don’t want you to know the exact day that the price will pull back off the lows or pull back from the highs. That said, there will be a pullback before they then move the price back into consolidation.

When looking for trading opportunities, you need to identify, at any given moment in time, where the price is on the Market Maker Cycle.

Knowing that provides you with the opportunity to determine what the next move is going to be.

Wyckoff Method

The Market Maker Cycle outlined above is, in part, based on our experience of trading the market. An experience shaped by our interpretation and adaptation of the Wyckoff trading method.

The Wyckoff trading method is a price action based methodology.

You can use the Market Maker cycle/Wyckoff Price Cycle to recognise upcoming price moves.

Discovering the Wyckoff Price Cycle was a defining moment in our trading journey.

It applies to all markets equally.

Wyckoff Price Cycle

1. Accumulation

2. Profit release | Markup

3. Distribution

4. Profit Release | Markdown

These four phases are the Market Makers business model, this is how they make money.

Understanding the business model of Market Makers and, more specifically, the Market Maker Cycle is critical for any trader or investor.

Just as a retail store relies on customers for revenue, Market Makers depend on traders’ market participation. The more you understand their tactics, the more confident and in control you become in making refined trading decisions.

Market Makers Accumulation Phase

For Market Makers to successfully execute their accumulation phase, they employ a specific strategy. This strategy allows them to collect buy or sell orders based on the anticipated market direction without alerting other traders.

They manage this by maintaining the market trading within a limited range. This isn’t congestion but a period of active accumulation.

By confining the markets to this limited range, they deter traders from developing strong convictions about the market’s direction, thereby creating a setting where Market Makers can discreetly accumulate the orders they need.

However, as this limited range persists, the number of traders entering the market will decrease, which is typical as interest begins to diminish.

Conventional trading indicators might lead traders to link this declining interest with one side of the market, either buying or selling. However, this is not a certainty, and such a mindset can result in forming assumptions about the market’s probable direction. Once you establish such an assumption, you’ll adhere to that market side, even if the market activity indicates otherwise.

Therefore, Market Makers employ two strategies during the accumulation phase:

– maintaining a limited trading range

– and stop taking.

With some practice, you should be able to identify these strategies. But remember that you’re not merely looking for patterns; you’re scrutinizing the market’s underlying activity.

Market Makers manipulation strategy

Unlike the accumulation strategy, the Market Makers’ manipulation strategy is not covert at all; if it were covert, it would have no effect and thus not provide the market maker with any benefit.

Let’s examine this in more detail.

For this example, we will assume the Market Makers have completed part one of their accumulation strategy, the covert accumulation of (in this example) buy orders.

As explained earlier, it will nearly always be impossible to accumulate the full desired quota in this manner due to increasing apathy as the market range decreases, along with the volume of activity.

The manipulation strategy of the Market Makers unfolds in a series of steps. The aim is to sway the beliefs of the outside traders, leading them to place orders in the wrong direction. The most reliable way to achieve this is by steadily moving the price towards a high or low point closely aligned with the current market activity.

Let’s visualize this in chart form.

In the chart below, the Market Makers have completed their first accumulation strategy, shown by the box. (we are assuming an accumulation of buy orders in this instance).

During this phase, outside traders also purchase buy orders. Unaware of the Market Makers’ accumulation of buys, they anticipate the market to rise.

It’s crucial to remember that these traders’ beliefs are strengthened by any upward movement, which significantly influences their trading decisions.

By the time the market reaches point (A), the outside traders who bought within the Market Makers’ accumulation area start feeling confident about their decisions. They will likely place their sell stops at the underside of the box-like accumulation area (B) to prevent losses.

If the market continued to rise from (A), the Market Makers would miss the chance to accumulate more buy orders, thereby reducing their profit release phase.

At point (A), the Market Makers will likely sell a block of orders, causing the market to turn down towards (C). This downturn allows them to accumulate many buy orders as traders start to sell.

Remember the traders who bought earlier and placed their sell stop-loss orders at (B)? As the market turns down to (C), the sell stops will be triggered at (B), and the other side of a sell order is a buy.

Consequently, the Market Makers accumulate the sell stops as buy, and the market rises. Observing this, traders also start to buy, placing their sell stops at (C).

At this stage, if the Market Maker has accumulated all the buy orders they know they can sell into the demand then the market would continue directly up from (C) and beyond (D) into the profit release phase.

If the Market Makers want to accumulate more buy orders, they will repeat the process of taking the market below (C) to (D), again triggering the sell orders, which they accumulate as buy orders.

This type of market activity is manipulation. The Market Makers are manipulating the market, but ultimately, they are shaping the beliefs traders hold about future market direction.

Once the Market Makers accumulate all the buy orders they desire, they will move to phase two and strategy three.

Market Makers profit release phase

The profit release strategy is the easiest to orchestrate. It is kicked off by either or a mixture of:

– Rapid price move out of the final accumulation area

– A news release

– Rapid movement in another market.

In short, anything that can justify a rapid markup of prices.

This phase has some obvious characteristics; they are evident because this is where the outside traders are actively invited and encouraged to make money.

Without the willing participation of the outside traders at this point, the Market Makers will be left holding the bag with nowhere to go.

But now, where will the market move to?

In the chart below, the market makes a clear and defined move (E); the outside traders will see this and immediately start buying the market.

The Market Makers who bought earlier and have a much lower average price will now sell some of their buy orders to outsiders, thus releasing profits for themselves.

Looking at the chart, you will notice a series of small drop-backs. These are marked with an (X). The Market Makers’ profit release on this first rise causes these drop-backs. As the Market Makers willingly sell to the outsiders rushing in, they oversell to the demand, so demand from the outside is not enough, and thus, the price retraces a little.

The Market Makers see this and quickly buy back what they over-supplied on the rise.

This again has the effect of pushing the market higher onto its subsequent rise (F), encouraging yet more buyers for the Market Makers to release their accumulated buy orders too, and so onto (G)

Where is the high or low?

More money is lost on predicting market highs and lows than any other trading strategy. Mainly because traders use chart patterns and technical indicators to measure something that is not based on numerical values numerically.

However, there is a simple law that will always predict the end of any upward move and the end of any downward move. This law is one of profitability.

Market Makers will only move a market up as long as they have bought orders to sell at a profit. They will only move a market down for as long as they have sell orders to profit from.

To take a market higher without any buy orders to sell at higher prices later on for profit is like a shop owner opening a store without anything to sell. Sure, a few people may wander in, but how long will they hang around?

Distribution Phase

The third stage of the Market Maker Cycle is the Distribution phase. In this phase, the bears attempt to regain authority over the market.

At this stage, the price action on the chart is similar to the Accumulation phase.

One indication that the market is in a distribution stage is the sustained failure of price to create higher bottoms on the chart and price action creates lower tops. That indicates that the market is moving to the Markdown Phase.

It should be noted that this Distribution phase could in fact be an Accumulation phase and be followed by a further Markup phase.

Markdown Phase

The last stage of the Market Maker Cycle is the Markdown phase.

The Markdown phase is characterised by a downward move in price.

When the price action breaks through the lower level of the chart’s distribution channel, the Markdown phase is confirmed.

The price action on the chart is similar to the Markup phase, only in reverse.

Once complete, the entire process repeats, starting from the first stage – the Accumulation process.

Once you can observe each phase and strategy for each phase being played out, you only have to wait for the profit release phase of the Market Maker Cycle and then join it.

When To Trade The Market Maker Cycle

If the adverts for the Forex market are to be believed, the Forex market trades 24 hours a day, and you can jump in anytime. That Liquidity is available at all times, and you can trade what you want when you want.

Now that’s not strictly true.

While you can place an order at any time, there are times when liquidity is virtually non-existent. More specifically, there are times when the Market Makers are inactive.

We call the times when the Market Makers are inactive the ‘gap times’.

You want to trade with the Market Makers. Therefore, you need to know when they are active and when they are inactive.

So what are the trading hours and where are the gap times?

Typically, the Asia session is from 1.30 pm through to 8 am. (Please note that all times are reported from a UK perspective GMT+0)

That’s where the initial accumulations phase happens. It’s also the period that the Market Makers set the initial high and low.

The London session is from 8.30 am to 2 pm. This is the period where you’ll see the stop hunt and trend move.

Normally the New York session starts at 2.30 pm through to 10 pm. This is where you’ll see the reversal and end of day consolidation.

The final session is from 10 pm through to 1 pm.

Typically referred to (from the New York perspective) as the end of the day session, it is effectively a gap time.

Prices don’t move much in this period. The market is effectively closed, and there is little if no liquidity.

Gap Times

You will note from the above that there are gap times between each session.

The gap time between the Asian session and the London session is 8 am to 8.30 am.

There is little price movement in this period as the Market Makers in the Asian and London session are talking to each other. They discuss what needs to happen in the London session to get the price to where they want it to be.

The same applies in the period between the London and New York session.

Between 2 pm and 2.30 pm, the Market traders in both sessions discuss what needs to happen during the New York session.

While not strictly a gap time, the period between 5 pm and 7 pm is a period of limited Market Maker activity. More specifically, it’s the period where the Market Makers in New York are at lunch.

As part of your trading strategy, you need to consider what’s open and, as important, which currency pairs are most likely to move at the time of your trading.

Beware Of The Market Maker Traps

Trap moves are price moves at different points throughout the week, throughout the day and the session. Price moves made by the Market Makers to trap traders into a sell position or trap traders into a buy position.

These trap moves induce you to take a position and, as soon as you take a position, it goes against you.

They typically happen at the beginning of the week. So usually Sunday night into Monday open to create either the high or the low for the week.

They can happen at the beginning of the day, they can happen at the beginning of the session or at the end of the session. They can happen at the beginning and end of the day and the beginning and end of the week.

Market Makers set traps at the end of the day almost every day. Trap moves made to induce you to take a position that is going the wrong way.

You will see price pull back at around 8 pm as they attempt to pull price right back into the mid-range.

Trap moves at the end of the week induce traders to take trades over the weekend.

The Market Makers want you trapped in a position over the weekend. It provides them with the opportunity to gap the market.

They do a cost analysis before the opening of the Asian session on Monday morning.

They look at all the different stops, look at all the different positions and if they can gap the market against the open positions and close the positions at the worst possible time for the traders (and take your money), they will.

It’s like a license to steal.