This is a guest post from Tino @tradersreality. This article originally appeared on tradersreality.com and is reposted here with permission.
Everyone’s effort towards understanding the psychology of how to trade, really goes to waste if there is no understanding of how the market really works.
There is massive pressure on new and developing traders to learn various ways to trade using Support/Resistance, Elliot wave, Fibonacci, RSI, and Moving Averages. Your most likely to experience a lot of how they would work under different circumstances and you think “Have I missed the boat, is everyone doing it this way?
Now as much as I am an advocate that having a sound psychological practice when trading will undoubtedly assist and help you towards becoming a profitable trader, understanding how the market works, is all that you really have to know in order to apply your psychology correctly.
Allow me to explain:
The market makers are the guys that make the market and that’s all there is to it. Now by only addressing the idea that “They” make the market, is not enough to warrant you towards being able to extract profits consistently. The idea is to understand that the markets are not your business, they are the market makers business. Their job is to extract profit from liquidity that is provided by… Guess who? …YOU, not to mention banks and mutual funds.
So how do we understand and how can we adapt to the idea of being able to trade what “They” the market makers see?
Okay, so you’re expecting me to tell you the magnificent way to beat these market makers at their own game and take all the money and become a billionaire.
Not quite, but through understanding their behaviour, you will not fall victim to the set ups they create which are engineered to make you open positions and put your capital, or should I say, exposure your capital as liquidity, that ‘they’ can exploit and make profit from.
Here is an example to deliver what I am trying to say:
Now I could break down charts continuously and explain this process over and over. Hindsight is what it is, of course I am going to be able to talk you through this process because I can see what has happened.
This is where understanding why the importance of paying attention to trading what “THEY” see, can determine whether or not you will profit from the price manipulations from the market makers.
The idea is to get used to seeing this behaviour develop. It always repeats. Why? because the market makers understand how to make retail traders, banks and mutual funds believe, that if price is going to do one thing e.g. test support, then everyone else watching the chart, will be thinking the same. The skill set is in understanding what the market makers are trying to achieve by exploring their behaviours at key areas of interest.
This may sound cryptic in its nature, however by simply putting nearly 9 years of trading/watching charts into a small blog post, well you’re better off buying knowing this before depositing money into a trading account.
The business of trading, is the market makers business of extracting money from others’ pocket to their own. If we, as retail traders, develop an understanding of how the market makers do this, we can profit from this behavior. As I said earlier, simply by following what the market makers do and training your eyes to see these price manipulations, over a sample size you are more than likely to make a profit. The reason I say this because the same behaviour is repeated over and over again. Why? Because human behaviour simply does not change.
You can follow Tino on twitter at @Tradersreality and visit his website at tradersreality.com.