if you were a big Investment Bank and you were charged with the task of making a return on billions and billions of dollars that you have under management how would you go about doing that would you leave certain things to chance would you just Place trades like everyone else or would you potentially look for ways that you can engineer the markets in your favor this is level two Market psychology the relationship between pain and certainty of liquidity so regard regardless what you would do as a Trader in that situation let me tell you what the
banks actually do the banks will stop at nothing and do whatever is necessary to guarantee that they have profits they're in the business of that it's emotionless to them it's all about how much money can they make and that's the bottom line now making profits on billions of dollars is much different than making profits on millions or thousands of dollars why is that well when you need to move around billions of dollars as a whole you run into one big problem when you're a bank or a big institution and that problem is liquidity you see
when they look to trade they need someone that they can trade with so that either needs to be a really big institution like them or it needs to be a lot of retail Traders or it needs to be a combination of both either way they need liquidity in the market for them to get in their positions and then when the market gets where they think it's going to go or they man at it there they need liquidity to get out and make that spread between when they got in and when they got out that is
their profit but they need liquidity on both sides to make sure that that happens successfully so how can you almost guarantee that there's going to be liquidity to get in and get out when you're that size it's pretty simple you understand where the market as a whole is going to be put into pain because pain creates action and action creates liquidity so that's what this lesson is going to be all about this is going to be a relatively short lesson but a very very important lesson so let's briefly revisit a few things that we've already
covered throughout this series but are very relevant to this lesson the markets are controlled through pain and pleasure now what does that mean that means that the markets the the actual liquidity shifting back and forth in the market is ultimately controlled by a natural human response and what is that it's a response to pain and pleasure okay pleasure causes traders to be complacent and lack what does that mean it means that when you're in a profit or you see a profitable trade on your screen it makes you feel what it makes you feel good do
you want it to ever end or do you want that profit to keep increasing you want it to keep increasing therefore you stay in the market because you're also afraid of it going without you and you could have had a much bigger profit right so it feels good you don't want it to stop you just want it all to just keep on going okay that's complacency so it makes it very hard for Traders to take profits off the table pain causes certain immediate action just like touching a hot stove if you see your account going
in the negative and it might be a profit that you've already seen but now you're losing that profit that feels painful or you might have just gotten into the trade and now you're out of the money same thing anytime you are now losing money or something is being taken away from you it is painful when it comes to the markets and what do we all want to do as humans with pain we want it to end we want to end it as fast as possible so what does that translate to pleasure means that we let
profits run and typically because the markets range 95 plus per of the time they come right back and take us out of the money when we get out of the money it's very easy to take decisive action but the problem is we're doing it at a negative so now that we've Revisited the basics of how pain and pleasure affect the market as a whole we want to zero in on one of those specifically which is pain okay pain is certain as far as the action that Traders take when they feel pain it is almost guaranteed
that they are going to want to end that pain they're want to get out of that trade the market makers need certainty of liquidity to run their business profitably they are going to be very interested in where Traders stop losses are because those stop losses represent what they represent pain they represent action and they represent liquidity and that's usually liquidity to get in and then they're also very interested in Traders stop losses on the other side because that is liquidity to get out so you could almost think of the market makers plan as figuring out
where are the stop losses to take the market to so I could get in and then when I get in where are the other stop losses on the other side that I could take the market to to get out so knowing what we know about the big Banks and the fact that they're not going to leave things up to chance if they can help it we could come to the conclusion that market makers or the big institutions set up ways to guarantee liquidity the way that they guarantee liquidity again is through understanding where other Traders
are going to be put into pain because pain guarantees action in the form of closing trades and that action means liquidity let's look at an example that walks us through a potential way that a market maker would set the situation up so in this example we're going to see how the normal Trader would deal with this rising market so right here we see the market made a bottom you could see that there's a p right there that represents the pleasure response so we've had traders that have found their way into the bottom of the market
right here have bought and are feeling pretty good they're starting to get into the money where would they put their stop- loss they would probably be looking at that very low point so we have a red line there and it says certain liquidity because that's what the stop is the stop is them telling the market maker telling the bank hey guess what here's my stop loss this is exactly when I'm going to feel uncomfortable should price get to this level right here is where I'm going to be in pain that's the power of the stop
loss right so they're giving that information up front so as the market goes up here it comes again we get another P there more Traders are coming in buying the market they're all getting in the money feeling good where's their stop loss going maybe below the last little low right there so we'll put a stop loss right there there is for certain going to be some people that are looking at that low to control risk bu another point of certain liquidity we keep going up here's another pleasure response more Traders have enter the entered the
market we have another pretty defined pullback right there as the market Rises so we'll put another stop-loss point right below that low we have another point of certain liquidity let's keep going so the market now really starts to take off all these Traders are now all in the money they're all feeling really great but what happens when you feel good when you're in pleasure they're wondering how much further could it keep going this looks like a really big breakout I think that this one's going to the Moon right they become lack adical but guess what
they left all that certain liquidity behind in the form of stop losses ripe for harvesting for getting in trades for the banks so the bank starts dumping Supply into the market remember the banks control the supply market makers in particular they control the gates of Supply so all they got to do is dump Supply into the market and prices go down what does that do it hits all of those stop losses creating liquidity in the Market at great prices because guess what if the uptrend is still intact if the market still ultimately is going up
the money flow is headed up on the larger time frames this is all temporary so here comes all that liquidity into the market in the form of those stops getting hit pain responses getting triggered market makers take the other side of that their accumulation becomes complete they got what they need and then sure enough here comes the real move this is a very very important lesson to learn in fact this is probably the most important lesson you'll ever learn when it comes to trading and I don't care what Market you're trading or understanding where pain
is released into the the market where that pain response is controlling Traders decisions if you understand those edges of the market and where they likely are then you start to think like the banks because again they're thinking about liquidity where do I get in how do I get in how do I get enough liquidity to get in and how do I get enough liquidity to get out you start thinking about the markets from that perspective you will start understanding all the market moves things that maybe used to totally confuse you you're like how could that
even happen how could the news come out and the market does that it'll all start to come together for you when you start thinking about it from the point of view of pain and certainty of liquidity for the banks so what's the takeaway profits are not left a chance especially when billions are at stake market makers and institutions will not simply hope for liquidity to enter the market they will set things up so that liquidity is certain the way to guarantee liquidity is to guarantee action from other Traders pain equals action
