Market Maker Cycles Explained
Three day cycle
As a trader, your first job is to identify the zones, particularly the current place in the cycle. The zones or levels can be described under the following headings:
Peak Formation High
The highest formation on the chart is the peak. They will pull away quickly and form out the M.
Level one and Consolidation
After falling away from the peak formation price falls into a new zone and reaches a Level 1 consolidation. During the consolidation they hit stops up, hit stops down and then drop it again.
Level two Consolidation
Price drops from the Level 1 consolidation to Level 2 and then into a new area of consolidation, Level 2 consolidation. Again, they hit the stops up, hit stops down and then drop price again to Level 3.
Having reached Level 3, the objective is a little different. Price will be dropped in order to demonstrate further bearish movement by satisfying various criteria of the traders. However, they then pull away quickly, move price up and book a profit. Level 3 will appear disorganized with price chopping back and forth, usually within a wide range.
Peak Formation Low
Following Level 3, a new peak formation low defined and the cycle starts again. This becomes an area where you are aiming to buy with the market makers, even though all of your other indicators and prior learning will have told you that this is still in a sell zone. So you will be buying against what you have learnt previously; against the rest of the world; you will be buying against the trend.
Within the 3 levels, the amount of activity of the MM varies.
- The 1st level and its correction is driven by the market makers and is characterized by fast moves.
- The 2nd level and correction is market-driven in the absence of market-makers support. Instead it is driven by emotional traders who enter the market. Because this is not driven by the market makers the size of the moves tends to be smaller. This is because retail traders don’t have access to the size of trades or the coordinated effort to move price at will.
- The 3rd level and its correction see a return of the market maker to the table. This is an area of profit taking for the market makers where further movement in the direction of the technical trend is encouraged before the stops are triggered. Traders can become panicked and confused. During the 3 levels market-makers will buy from traders to create positions. The heaviest volumes are seen at the 3rd level.