TAKING Money From Forex MARKET MAKERS Weak Points

Would you like to be able to make money at the expense of the forex market makers? Those devious, sneaky, immoral, some might say downright criminal manipulators of price? Well, stick around and I will show you how that's possible. And I'll also dispel those myths and prove that market makers are actually a retail trader's best friend. My name is James and I'm going to show you exactly how market makers operate, what their weaknesses are and what that means for your trading if you want to make more money. Let's use an analogy of apples to get started. You buy them from a store. The store owner is a market maker. Anyone with apples to sell goes to. The store owner says, will you buy my apples? The store owner says, yes, I'll buy them for 90 cents each. Once he's bought them, he puts them on a shelf. Then you walk into the store and you say, I'd like to buy you some apples. And the store owner says, no problem, I sell them for a dollar each. If they buy apples for 90 cents and they sell them for a dollar, they they've made 10 cents profit. That is market making. They buy at one price and they sell at a higher price. It's the same business model with just about everything on the shelves. And they're competitive. If you don't like the price that one store sells at, you just go to another. So the market makers try to give you the best deal because they want your custom. Market makers provide low cost convenience. It's an amazing service. So now let's look at market makers who specialize in currencies. If they buy US dollars from someone selling them, they now own those dollars. They put them on their shelf. This is their inventory. If a customer comes along and wants to buy the US Dollars, they take them off the shelf and the shelf is now empty. Straightforward. A market maker is independent and they can set their prices to anything they want. This is their bid that they are willing to buy at, and this is their offer or the ask that they are willing to sell at. And the difference between these two prices can be anything they want. If they want to mark it up by 5% or 2100%, they can. It all depends on how big they want their profit margins to be. But of course they have competition. If they set their bid in their offer at these levels and a different market maker is prepared to buy at a higher price and sell at a lower price, then of course all of the sellers will come to this market maker because they can Sell at a higher price. And anyone wanting to buy will also come to this market maker because they can buy it cheaper. But this market maker would quickly put this market maker out of business. And in terms of competition, there are literally hundreds of market makers all competing. Which dispels any myths about collusion, manipulation, price rigging, deception and conspiracies. If the top 20 banks all agreed to fix the prices like this, it would only take one of the other hundreds of smaller market makers to step in with more competitive pricing. And they would steal the entire market share of customers. Forex is the fairest, least manipulated market in the world. Okay, so now let's look at how prices on a chart change. Think of market makers as having a warehouse. They must have a supply ready and waiting to go. That's their inventory. This generally remains the same. If they sell one unit, they want to buy one unit back. It's called being flat. They want their inventory to be balanced. They don't want to add too much to it and they don't want it running too low. Anytime it is out of balance, they try to rebalance it and get flat as soon as possible. So this is their stock of currency. They buy one unit at this price and they sell one unit at this price. And we'll keep the number simple. They buy one lot for $1 and they sell one lot for $2. Their inventory is flat and they've pocketed $1 difference. This is the market maker's dream. An ideal world for market maker is the price never moves. But market makers do not control the market. Let's say there are more buyers than sellers. A currency in high demand reduces the overall supply and those conditions cause increase in price rises. So this market maker sells one lot at this price, another lot at this price, another lot here at $3, another at 4, and another at $5. Altogether, they've sold 5 units or 5 lots of for a total of $15. Now their inventory is out of balance, so they need to fix that. As the offer price rises, they also raise their bid price because they are trying to attract sellers. If they didn't, another market maker would fill that gap and steal their customers. So this market maker wants to be the most competitive. They raise their price aggressively and they buy two units for $3, another two units at $4 and one unit at $5. And now they've managed to rebalance their inventory. Two quick things to note. First, when their inventory is balanced, they will set their prices equally. Let's say that is 1 million. They buy one sell one, sell one, buy one and everything stays mostly balanced. When they are out of balance, they are just more heavily on one side than the other. In our example, they have one lot at each offer level, but increase that to two at each level. On the bid side, they are aggressively trying to rebalance their inventory. The second thing is look at the profit and loss. Their inventory is flat, but they've actually made a loss. They sold five lots for a total of $15. They bought back five lots for a total of $19. That's a loss of $4. So now they're going to adjust their price, not just the quantity. When everything was balanced, they have a spread of $1 between their bid and their offer. Now when things are unbalanced, they simply increase their profit margin and widen their spread to $4. If they buy one lot here, which was the last of the five lots they bought in our previous example, and the market keeps going up, it will soon reach this level and they will sell one lot and pocket $4 difference. Their profit and loss is is now equal. Having sold and bought exactly $19, they've recovered their inventory and their profits. You can see from these examples that market makers are vulnerable to risk and loss just like every other market participant. They are not the all powerful gods as some people imagine. That was just looking at one market maker in isolation. But there are dozens of market makers, so let's look at 5. Market Maker A has a spread of 5 points and so does market maker B, C, D and E. At any one moment in time they will all be in a slightly different position of inventory, balance and profit and loss. They may all have a five point spread, but market maker A has their bid here and their offer here. Market maker B is more competitive on the bid but less competitive on the offer. Market maker C is even more competitive on the big but less competitive on their offer. And market maker D looks like this and. And market maker E looks like this. The price we see on our charts are made up of the bid from market maker E and the offer from market maker A. This is going to be the single biggest factor showing how predictable price movements are in Forex. Let's assume each market maker submits 1 million units of currency or 10 lots. Occasionally you'll find two or three with a singular offer, so they overlap. The best bid and offer are known as at the market. This is what you see or as the prices on your chart. All the other levels are behind the market and this is the depth of market. So here's our market you've got 2 million offered at each level at depth and 2 million bid at each level. That's 20 standard lots apiece. If I come into the market and I buy 1 million and you come into the market and you sell 1 million, the market won't move in either direction. You only sold half of the amount that they are trying to buy. At this price. I only bought half of what they are trying to sell. Now let's change that situation and assume that for whatever reason, the market makers have adjusted beer offers and now there's only a quarter of a million at each level at the market behind it. On the office side, when you and I come into the market with our exact same sized orders, the market is now going to move up. Your order still only takes half of the amount that the market makers are trying to buy. My order buys everything that they're trying to sell at this price, plus everything at this price and this price and this price. The next best available offer is up here, five levels away from where we started. All else being equal, the price will move in the direction of loose liquidity. That is the most predictable thing in Forex, virtually a license to print money. So now let's go back to our earlier example of how market makers adjust their prices according to their inventory imbalances and how this works to our advantage. Imagine balanced liquidity. But there are more buyers than sellers, which drives the price higher. Market makers have sold 1 million here, another million here, and here, and here and here. They've sold 5 million and bought none. So their inventory is depleted and they need to rebalance it. To do that, they start raising their big prices competitively, but their profit and loss is also impacted. They've sold high, but will now be buying back even higher, thus making a loss. They have a real sense of urgency to buy back and rebalance their inventory as quickly as possible. But they need to limit that loss, and they do that by increasing the quantity that they are willing to buy on the bid. If normally they're willing to buy 1 million, they may now increase that to 2 or 3 million. Assuming everything else remains the same on the offer side and, and they keep 1 million at each level. There is now more liquidity on the bid side. Now, if the same side orders come into the market on both sides, let's say 2 million, the market will move up, not down. The price will move in the direction of least liquidity. And in this situation, with the inventory and their profit and loss and balance, market makers are not only trying to attract sellers with their bids, they're trying to avoid attracting any more buyers at their offers. They move their offers further away from the market to be less competitive. They're trying to avoid those buyers. At the same time, they reduce the quantities on the offer side, dropping it from 1 million down to only 100,000. Think of liquidity like resistance. A very deep market with lots of liquidity is simply going to absorb any orders that come into it. Whereas a very thin market with only limited liquidity will simply get pushed aside and the price will race away. Knowing how market makers behave and if you watch my last video talking about dealing desks, you can see how we get reliable non random trends. Market makers inventory is balanced when buyers and sellers are balanced and that is most of the time. When bank dealing desks occasionally have very large orders on one side of the market, buying and selling pressure becomes imbalanced, the weight leans and there are more buyers than sellers. That knocks the market maker's inventory out of balance. In response, they adjust their bids and offers to try and correct that situation and that leads to an imbalance in liquidity. With out of balance customers and out of balance liquidity, you have the perfect conditions for a high probability, sustained non random trend. Stanford universally proved the price is always more likely to move in the direction of loose liquidity. That is the most predictable pattern in Forex. If you want to make the most money, you need to exploit this fundamental knowledge. And these are the key points to know about market makers. But above all, what I want you to remember is market makers are your ticket to easy profits. We couldn't make money without them at all. But the weakness in their business model is actually the most powerful thing that we can exploit to maximize our gains. Understanding when they are on the back foot is our opportunity to take advantage and capitalize on making the biggest returns. Making money in Forex is not complicated. It's just about being smart, understanding the game that we are really playing and taking advantage of the rules. My aim is to educate you in the rules and then show you the strategies to make sure you always come out the winner. And this series of videos is leading to exactly that. Where I will give you a simple system that makes easy profits. So be sure to stick around and explore my channel. Well, if you've enjoyed this video, please like it, leave a comment and subscribe. Your interaction will help the channel grow and I can continue to create videos like this and help you become a better, more profitable trader. So keep your eye out for the next video in this playlist. I'LL see you next time.