How to Spot Market Manipulation and Stop Runs
Market manipulation is the deliberate distorting of price action in order to deceive market participants through illegal or unethical means for selfish gain.
This could be to either inflate or deflate the price. The goal of market manipulation is to profit from favourable artificial market movements.
A definition of market manipulation may not do justice to the question you are most likely looking for as an answer.
How and Why is the Market Manipulated?
I want you to understand what a market manipulation zone is.
A manipulation zone is simply an area where the market has been manipulated and certain traders have been eliminated.
Let me give you an example.
For example, if a trader notices a potential double top, They typically like to place a sell order at the resistance level and their stops just above it.
The market hits its stop loss and almost immediately after taking them out, the market reverses in the direction it intended. This area is known as the manipulation zone.
How and Why Was The Market Manipulated?
To begin with, individual retail traders have little or no influence on price movements. Those with deep pockets are the ones who move and manipulate price action. Those with deep pockets, such as banks and other wealthy institutions, manipulate prices.
Market manipulation is caused by the need for large sums to be filled in the market. For example, a bank wishes to purchase $400 million in stock. Their orders would be difficult to fill immediately, and they would often incur losses if they simply implemented their order as any other retail trader would.
They typically use a quota of their investment fund—say, $30 million dollars—to create some bearish pressure in the market. As a result, traders are taking short positions due to the market’s bearish sentiment. So that they could enter at a lower or more discounted price. When the price reaches their desired targets, they will invest the remaining 370 million dollars in the stock they intend to buy.
This would sweep the sell stops and fuel the market’s bullish momentum. Having said that, let us now look at the various price manipulation strategies employed by these deep pockets.
There are 6 major types of market manipulation that have a negative impact on market traders.
- Market Rumors and Fake News
The creation of market rumours is one of the most well-known forms of market manipulation. Insiders would spread false information, enticing the vast majority to make trading decisions they knew were incorrect.
What they do is as follows. Some traders or investors fabricate false information in order to manipulate the price of an asset. For example, rumours were once used to make bad assets look good in order to raise the price.
It is usually difficult to make a reputable company look legally terrible in order to drive down the price, but it is not impossible. Typically, rumours or fake news can have a significant impact on the price and pose a greater disadvantage to short-term traders.
How Can You Avoid Falling Prey to False Market Rumors?
• Confirm the source of the market rumour: Do additional research on your own to ensure that the information being spread is from a legitimate and reliable source.
• Fade the first move. This means trading in the opposite direction after receiving suspicious news.
To put it another way, buy the rumour and sell the news.
To be able to fade the first move, you must be a market expert.
- Investor Pump and Price Dump
Pump and Dump are accomplished through the use of spam emails or messages, groups, and seminars.
Allow me to explain.
When the retail masses or investors buy into the stock, the “pump” comes off. This causes the stock’s price and volume to skyrocket.
The advocates sell their shares (“the dump”) as soon as retail investors commit to the stock, causing the price to fall.
Stocks with low volumes or volatility are usually easy for manipulators to manipulate. Based on the information presented above, you can conclude that investing in a stock with low volume or volatility is a bad idea. Avoiding new stocks that suddenly skyrocket is the best way to avoid this type of manipulation.
- Spoofing or Forgery
What is spoofing in forex? Spoofing is another market manipulation technique used by advanced and powerful short-term traders. This is what usually occurs:
These experienced traders place large orders at a specific level with no intention of executing them. Their systematic trading method (via algorithms or bots) allows them to execute a large number of trades.
As a result, when other investors see the pending large orders, they will want to trade in a similar direction, placing their trade at the same level, believing that some big sharks will want to sell or buy at a specific level.
The algorithm cancels orders before they can be executed, usually minutes or seconds before the market trades at their price. This quick action allows the manipulators to gain short-term market control.
After the spoofer or manipulator pulls the order, the market rises or falls, resulting in losses for anyone who was duped into buying or selling. Avoiding very short-term trading is the best way to avoid being trapped alongside many others.
If you want to trade short-term and profit from spoofing, you must be a sophisticated and experienced trader with the necessary infrastructure. To avoid Spoofing, I recommend that most retail traders do not trade short-term.
- Bear Raiding
Bear raiding is a manipulative technique used by large investors to drive down the price of a stock by placing large sell orders. The manipulator then spreads false information in the market.
While others are selling, the price drop allows the manipulator to profit from their losses. Bear raiding can last days, weeks, or even months. It has a greater impact on long-term traders.
- Wash Trading
Wash trading occurs when traders place opposing buy and sell orders. Wash trading does not generate profits or losses for the manipulators. This method simply increases the volume of trade in order to make the stock or any financial instrument appear more active than it is.
Traders who notice an increase in price volume may be enticed to invest as a result of the increased trade volume. Wash trading typically affects short-term investors such as scalpers and day traders and does not affect long-term investors or traders because it does not last long. Because wash trading has no long-term impact, long-term investing is the best way to avoid wash trading.
- Monopolizing The Market
Monopolizing the Market occurs when an individual, a body, or a group of people attempts to gain control of the majority of an asset or a stock in order to direct or dictate the price of the stock or asset.
It takes a long time to carry out this manipulation, which hurts long-term investors. To avoid becoming entangled in this, you must conduct extensive research on any financial instrument in which you intend to invest.
Market Manipulation in other forms
When someone has important information about a company’s financial decision before it is made public, they engage in inside trading in an effort to profit when the information is made public.
Churning occurs when brokers or fund managers in control of sizable sums make a lot of trades to boost their trade commissions. Their investors might not actually benefit financially from this. Although the general market investors may not always be harmed by this type of manipulation, the individual investor is usually harmed.
If market manipulation becomes widespread, it can disrupt financial markets and create an unfair environment for investors. Retail traders who are impacted by this are those who are unaware of prospective market dangers.
What is Stop Hunting?
Stop hunting, which is similar to market manipulation, happens when powerful market manipulators target stop loss orders close to a level to satisfy their own liquidity needs.
Stop search is a crucial component of technical analysis, in contrast to the market manipulation strategies I’ve discussed above, which may be quite essential in fundamental analysis.
How Do You Prevent Stop Hunting?
Let’s get right to it: You cannot claim that you can completely avoid stopping to hunt. However, there are strategies you may incorporate into your trading strategy to reduce the likelihood of being stopped.
Setting your stop loss strategically is another key approach. Don’t place your stop loss just above or below major support or resistance. The majority of traders place their stop loss there because price tends to shift from one liquidity point to the next and because liquidity rests above resistance and below support.
Observation: stop loss = liquidity
Given this, placing your stop loss immediately above significant resistance is not a good move (or below major support).
Now the question is: Where should my stop loss be placed?
It would be a very good idea to keep a decent distance from the support or resistance. The Fibonacci Retracement tool can be used to help you calculate your stop loss.
Setting your Stop Loss at a moment where your trade is no longer valid is another crucial consideration. In general, pullbacks, breakouts, and chart patterns serve as the foundation for many traders’ entrances. The usual guideline when trading a pullback is that your stop loss should be above the previous high or below the previous low.
The general rule for breakouts is that your stop loss should be below or above the consolidation.
The stop loss should be put where the chart pattern no longer holds true if your entries are based on chart patterns.
Market manipulation occurs in all time frames, also in stocks, cryptocurrency or forex trading. Both short-term and long-term traders suffer from market manipulations but short-term traders are affected the more.
Always protect your trading account with an amount you can afford to lose and maintain a good risk-reward strategy.
Never do without using stop loss to the prevention of market manipulation because you could lose all your capital.