It is crucial to understand how market manipulation targets retail traders.
As retail traders, we don’t have the capital or resources to influence the price of currencies or stocks in the short or long term.
This lack of influence makes us frequent targets of manipulation,
with institutional players making millions by intentionally manipulating the markets.
As a result, retail traders must adopt strategies to navigate this game effectively.
What is Market Manipulation?
Market manipulation involves the artificial adjustment of currency, stock, or other security prices.
The manipulators, often large institutions or influential individuals, do this at the expense of retail traders.
The purpose may range from controlling consumer spending to making enormous financial gains.
Below, we will examine the individuals or institutions responsible for these tactics and explore their methods.
How Market Manipulation Targets Retail Traders: Hedge Funds
Hedge funds are corporations or private investment partnerships that pool capital from accredited investors and use it to generate profits.
Accredited investors are individuals who meet specific income or net worth requirements,
typically excluding middle- and lower-income individuals.
This regulation exists to protect less-wealthy individuals from the high risks associated with hedge fund investments.
The sole purpose of hedge funds is to maximize profits for their organization and investors,
treating everything else as collateral damage.
Instead of relying on fundamental or technical analysis, hedge funds create opportunities by engineering outcomes in the market.
Fear and Greed
A significant reason why over 90% of retail traders fail is the influence of fear and greed.
Hedge funds understand that human behavior is driven by emotion,
and they exploit this through psychological tactics that bait retail traders into unwise decisions.
Many of these practices are entirely legal. For instance, hedge funds leverage traders’
fear of losing and their greed-driven FOMO (fear of missing out) to push them into ill-timed trades.
News Manipulation
The manipulation of news is a key tool used by both retail and institutional investors to influence market decisions.
Retail Traders and News Manipulation
Consider this scenario: a trader buys shares in a company called ShapeShifters. After making their purchase,
the trader posts glowing reviews of the company on social media, spreading rumours about its potential to dominate the market.
This kind of manipulation relies on virality, as more people buy shares based on exaggerated claims.
Hedge Funds and Strategic News Manipulation
Hedge funds use a more strategic approach. For instance, if they’ve entered a long position in ShapeShifters at $30/share
and want to exit without causing a massive sell-off, they might fabricate rumours about ground-breaking products or innovations.
By using their connections with major media outlets, they make these rumours appear true,
which retail investors spread further.
As retail traders pile into the stock, its price rises, sometimes to $40/share or more.
During this frenzy, hedge funds silently sell their shares, locking in profits.
When the fabricated rumours lose momentum and institutional players exit,
leaving only the retail traders with buy positions, the stock price collapses,
leaving retail traders with significant losses and hedge funds swimming in millions of profits.
Pump and Dump Schemes
A pump and dump is a securities fraud scheme
involving the artificial inflation of a security’s price using false or exaggerated claims.
Hedge funds employ this tactic to maximize profits with minimal risk.
Here’s how it works:
- Hedge funds enter a large buy position to inflate the stock’s price, causing volume indicators to attract retail traders.
- Retail traders mistakenly interpret this activity as a signal to buy, pushing the price even higher.
- Hedge funds sell their positions near the peak, leaving retail traders to bear the loss as the price plummets yet again making millions in the process.
How Market Manipulation Targets Retail Traders: Central Banks
Central banks also influence markets, often for macroeconomic goals rather than profit.
However, their actions still impact retail traders.
Increasing Interest Rates
When central banks raise rates to control inflation, borrowing becomes more expensive
for consumers, small businesses, and corporations.
This decreases market activity, driving stock prices down but strengthening the currency.
Cutting Interest Rates
Conversely, central banks lower interest rates to stimulate borrowing and spending.
This boosts stock market activity but devalues the currency.
Such strategies can indirectly manipulate markets, as seen during the 2008 financial crisis
when central banks injected billions into the economy through quantitative easing.
How Market Manipulation Targets Retail Traders: Market Makers
Market makers, also known as liquidity providers, are essential for market operations,
but they also manipulate prices to profit from retail traders’ losses.
The Spread: Bid and Ask Prices
Market makers profit from the spread—the difference between the highest price a buyer is willing to pay (bid)
and the lowest price a seller will accept (ask).
This explains why trades often start with a small loss immediately after being executed.
Stop-Loss Hunting
Stop-loss hunting, often in the form of bull raiding or bear raiding,
involves placing large buy or sell orders to trigger stop-loss levels.
For example, market makers may push prices
above resistance to bait retail traders into entering buy positions.
Once stop-loss levels are placed just below resistance,
market makers inject large sell positions,
triggering the stop losses and causing further price declines making the markers millions from their short position.
How Market Manipulation Targets Retail Traders: Conclusion
Market manipulation is pervasive, with hedge funds, central banks, and market makers
all playing a role in targeting retail traders. However, with the right strategies and an understanding
of how the game is played, it is possible to join the small percentage of retail traders who achieve long-term success.
The key is staying disciplined, avoiding emotional decision-making,
and adapting to the realities of a market stacked against you.