Trading strategy based on liquidity providers’ preferences

It’s hard to imagine modern financial markets without market makers – companies which provide liquidity. If not for them, slow-moving trading would create a perfect environment for manipulations where prices would soar and collapse for no reason. Still, even market makers can’t save Forex from a risk of flash accidents, which the Japanese yen, the Swiss franc and other currencies have faced in the past 5 years.  But such events occur rarely, thanks to liquidity providers. 

Market makers’ profit comes from the difference between buying and selling prices. If there has been a long consolidation amid low trading volumes, market makers won’t be happy. On the contrary, when quotes update latest extremums, where stop orders or pending orders have been certainly placed, liquidity providers rub their hands. 

 TPSL1 and TPSL2 levels where most likely a big number of orders have been placed

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How can a regular trader make use of this information? First, pay attention to long periods of weak market activity. They usually manifest themselves through forming a narrow trading range and low trading volumes. Second, check the way trading volumes behave when leaving the trading range or when they are near TPSL1/TPSL2 extremums. The ideal version would be a sharp growth of volumes and wide spreads. They will suggest the most likely direction of prices in the short term. 

GBP/USD quotes leaving the trading range

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During the whole American and Asian session GBP/USD traded inactively. That didn’t satisfy the market maker for sure. Pushing the market towards selling, the liquidity provider made traders want to conduct trades. Knowing where the quotes would move to, we could sell the pound during the growth. In this strategy a protective stop order should be placed a bit above the lower limit of the previous consolidation range. In the ideal scenario, the price won’t get back to that range. It will mean the weakness of bulls.  Bears shouldn’t go too enthusiastic and set fantastic targets because it’s a short-term speculation. Sixty or seventy points will be enough. 

Work strategy based on market maker’s stimulation of trading activity

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A similar situation may happen to other currencies too, including EUR/USD that is traded actively in the Forex market. If it trades in a narrow range amid low volumes most of the American and Asian session and then “explodes” suddenly, the breakout bar’s closure will point to a future direction of quotes. It happened on 5th May when EUR/USD grew to the lower limit of the previous consolidation range, which allowed going short. The same can happen now if bulls fail to return to the previous trading range that formed because of traders’ low activity.

EUR/USD quotes leaving trading ranges

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So, we can form our strategy knowing that market makers are interested in stimulating traders and remembering that trading volumes behave in a peculiar way when going outside consolidation ranges. Such a strategy will be based on understanding market processes, not on blind actions inspired by “tried-and-true” signals.


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Price chart of EURUSD in real time mode

Forex: in one boat with market makers

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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