Forex Trading: Market Manipulation

Forex Trading: Market Manipulation

Even in the brightest of days, shadows lurk at every corner. Forex is no different; while it is a glamourous market where trillions of dollars change hands daily, there are unethical practices happening that seek to exploit traders. From sophisticated schemes orchestrated by institutional players to opportunistic maneuvers by individual traders, Forex market manipulation can distort prices, erode trust and undermine market integrity. In this post, we share more about such shady practices, so that traders can protect themselves against such practices.

In essence, market manipulation refers to the deliberate attempt to interfere with the natural price movements in the financial market for personal gains or to create artificial market conditions. While this is more common in cryptocurrency as well as  stocks, forex trading is also susceptible to such unethical practices. However, it can be said that these unethical practices are somewhat diluted due to the large amounts that are already being transacted daily. What are some of these market manipulation techniques that are being used?

• Pump and Dump

The technique that is often used in stocks and cryptocurrencies. Pump and dump refers to the artificial inflation of the price of a currency pair through deceptive or misleading information, enticing traders to buy or sell into the hype. Once the price hits a high or a low, the manipulators get rid of their positions, causing the price to go the other way. While these manipulators get away with a win, the other traders suffer significant losses, often wiping out their accounts. This deceptive practice exploits the greed and the traders’ fear of missing out, leading to their significant loss.

• Wash Trading

A technique that involves simultaneous buying and selling of the same currency pair by a single trader / group of colluding traders  to create the illusion that there is genuine trading activities ongoing. By creating this fake volume, manipulators seek to attract unsuspecting traders and manipulate market sentiment. Traders that are misled into believing that there is actual market interest, will enter the market. Wash trading typically affects the day traders and scalpers that enter the market to make a quick profit. As they have small stop losses with larger take profits, they often hit their stop losses.

• Insider Information

A technique that involves taking financial action as a result of knowing something that is not public information. For example, traders working in central banks could be privy to major news in advance that sends the currency tumbling. By acting on the news ahead of time before the release, these traders stand to profit ahead of time compared to other people. In many countries, the act of buying first before the release of information is illegal as the marketplace is supposed to be fair to all participants. Whilst the other traders are not manipulated into losses, this action is unethical as there is an unfair advantage the trader has before others.

• Spoofing

A technique involving the placement of large, phony orders in a specific currency to develop a fake interest in that currency. As a result of the increased demand, prices will increase through artificial inflation. This in turn attracts more investors, but the broker will cancel these orders before their execution as the people that place these orders have no interest in actually realizing these order. The traders that fall for this stand to lose their money as they enter the market based on a false signal, while the market manipulators stand to gain from trades entered to exploit such interest.

These 4 types of market manipulation only covers a portion of the various market manipulation out there in the market. As traders, we must be aware of such practices and avoid them. Market manipulation undermines the fairness, efficiency, and integrity of the forex market, and we need to be vigilant so as not to fall for such techniques. Do not fall for rumors and board the “hype train” to complete loss.