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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?

Simple.

Follow them.

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:

Trade Example

Focusing from the first red arrow and going right: Here is how the market makers suck in the liquidity.

First Red Arrow and Second: Here you see the market makers get active below the 107.525 area. This area would be deemed a notable area of interest as it is a halfway point of the price range of 107.000 to 108.00. Now those who were short, would have added more position when price came down with heavy volume, you will see the candle before the two blue candles, showed a strong push down. (Just after the first Red arrow). This is the market makers creating the illusion that the price is going to go further down. An influx of shorts enters the market, then at this point the market makers can see liquidity coming in which they then use to send price back up so that they can take out the short stops put in place.Then you see price rise up, in the meantime, taking out all the liquidity of those who were short, by taking out their stops. a classic move by the market makers, a stop hunt.

The 2nd Red arrow is showing the same behaviour, those who were short thought, ah ok it’s now going back down again and is going to break the previous attempt, let’s get in. Market makers start to get aggressive and get active in this area, (Notice the big red candle and pin bars developing at the 2nd arrow). Before you know it, the same has happened again, short liquidity is coming in because of the illusion the market makers create, which in turn allows them to get their longs filled at lower prices in anticipation to close them at higher prices.

The 3rd arrow is the same story but flipside, The market makers create the illusion that the bears have realized that a double bottom may have been achieved and they want them to believe price will continue up, so the market makers send price up to the yellow line (200 day), the green candles (3rd arrow) that are developing are creating a climax, similar to the last two candles we just spoke about, you guessed it, the same shit happens here. The market makers create the illusion that price is going up to entice liquidity (Retail traders, banks Mutual funds) to enter into the market, set their stops, and then mark price down to absorb the stops of those who went long..

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.

Trade what they see
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