Stop Hunting with the Big Forex Players,Can I Take Advantage of Forex Stop Hunting?
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By changing your mindset from that of a retail trader to an institutional trader, you are able to ride on the coattails of smart money towards profitability. In order to be able to take advantage of stop hunting, you have to change your mindset to think like the smart money. We now know that institutional traders are looking to buy at levels where retail traders are going to bunch their stop loss orders.
This particular Stop Hunt Indicator for MT4, helps identifying where traders will place their stop loss orders. The thicker the line displayed on your chart, the larger the indicator sees the potential cluster of stop loss orders being placed. To keep things simple, only the two largest potential clusters of stop orders on the chart are displayed — One above resistance and one below support.
Even after understanding how stop hunting actually works, traders are still going to be skeptical of their Forex brokers. In saying that however, while the majority of stop hunting is a natural function of an efficient market, there are certain things you need to pay attention to when it comes to your broker.
First of all, you must understand how your broker makes money — That is whether they run an A-book or B-book business model. One way many traders think A-book Forex brokers stop hunt, is by widening their spreads around news.
However, this is most often done simply because the prices quoted from liquidity providers reflect a thinning of the underlying market during these periods of unpredictable price action. Best known by retail traders as market makers , B-book brokers actually do trade against their clients. With their own order book of positions and the ability to control the prices displayed to clients, B-book brokers can technically manipulate prices in order to stop hunt their own clients.
We will try to unpack some of these trading myths , and provide some direction on how to reduce the frequency of getting stopped out. One of the more widely circulated conspiracies within the Forex market is the idea of stoploss hunting. Most traders have experienced what they believe to be a stoploss hunting expedition on the part of their forex broker , other professional traders, or some other force within the market. The phenomena of stoploss hunting describes a scenario wherein you have entered into a position and set your stoploss price.
Some point afterwards, the price trades directly into your stoploss level, taking you out of the trade. Then almost immediately afterwards the price reverses and moves in your intended direction. Anyone who has experienced this can vouch for how frustrating it can be when this happens on a trade. And the worst part of it is that this type of activity is not a one-off event, but rather something that happens quite frequently within the financial markets, particularly the spot forex market.
As a result, it makes traders wonder whether they are simply a victim of bad luck, or whether something more sinister may be occurring within the markets they trade.
The common sentiment among Forex traders is that these stop gunning activities are done by their brokerage firms, who may be taking the other side of their clients order flow. Later on, we will be diving into whether this is a reasonable concern or merely a blown up myth within Forex circles. So why would any market players engage in stop gunning activities?
Well, if you understand the concept of market liquidity it will help illuminate why these types of events occur. Unlike most retail traders who are only trading relatively small size, larger market players, such as hedge funds, institutions, and proprietary trading desks rely on large pockets of liquidity in order to efficiently get in and out of the market.
These participants are very familiar with where and how most retail traders place their stoploss orders. As such, they may seek to temporarily move the markets in an attempt to find the needed liquidity to offset their true market positioning.
Now, many people view this type of activity by any market participant as market manipulation. However, you should realize that there is no collective concerted effort to ensure that your position ends up in the red. Instead you should take the time to start gaining a deeper understanding of the mechanics behind such market movements. And more importantly, you will learn how to avoid being a victim of these stop loss hunts, or liquidity runs , as the professionals call them. The vast majority of dealing Forex brokers in the industry do not hunt your stop loss or engage in lifting your stops.
Having said that, there may be some unscrupulous brokers that may engage in unfairly triggering your stop loss orders. This will be your best protection against unethical trading practices that may occur at some smaller unregulated bucket shops.
And not to mention their reputational damage in the industry. And so, the short answer to whether your broker is intentionally gunning for your stops, would be a resounding no in the vast majority of cases. Now from time to time it may feel as if your dealing broker is targeting your stop loss or manipulating their spreads.
Often, there is a plausible reason for this, but in the heat of the moment, we may feel that there is some grand conspiracy working against us in the market.
This is a more prevalent and plausible scenario that you should be focused on instead of putting the blame on your Forex broker. We obviously want to take the necessary steps to ensure that we are not falling victim to liquidity runs by the smart money players, but in the same token, we have to also take responsibility for our actions in the market.
You want to get past the blame game, and build a framework for placing your stop loss orders safely away from liquidity zones. With any type of new knowledge, first you have to understand the underlying logic. Only once you have done that and accepted it can you move towards utilizing that newfound knowledge to your advantage.
You have now come to realize that the real threat to your stop loss is not your Forex broker gunning for them, but rather the result of the inner workings of certain market participants themselves. As traders we know that one of the best protections that we have is trading with a stop loss. But what are some of the ways that you we can avoid falling into the stop loss hunting trap?
Fortunately, there are some techniques that you can incorporate into your trading that will help minimize these occurrences. Use the ATR Indicator — The ATR indicator , which is short for Average True Range is a volatility based indicator. It is very useful in helping to gauge the current market volatility. We can use this indicator in helping us better evaluate the optimal stoploss placement. We would take a multiple of the ATR reading and use that to measure the stop loss distance from the entry point.
For example, if the current ATR reading on the daily chart of EURUSD currency pair is pips, then we might set our stoploss at a 1. As such, in this case our stoploss would be placed at pips away from the entry point. Below is an example of the ATR indicator plotted along the lower pane of the daily price chart of AUDUSD. Avoid Obvious Areas — The more obvious a support or resistance level appears on the chart, the more likely it is to be used as a manipulation zone for liquidity runs.
Keep in mind, if you see an area which looks perfect for setting your stop loss, other traders are also very likely thinking the same thing.
And as such, these traders will also add to the stoploss order flow in that area. Smart players who are seeking liquidity in the market can sniff out these types of orders very quickly and efficiently. These stop losses create a pool of liquidity that they can exploit. Use Multiple Stop Losses — Scaling out of your positions is a technique that many professional traders tend to engage in.
Most retail traders however have an all in entry strategy and all out exit strategy. Although this works fine in many cases, you may see an improvement in your win rate by breaking up your stop loss orders and scaling out of your trades. This is certainly an exit strategy that is worth testing.
It can reduce the risk of being taken during the stop run since your stoploss orders are spread out over different levels. Spotting Rejection Zones — Stop running is most prevalent near clear support and resistance levels.
Stop hunting, at the name suggests refers to the phenomenon when price reverses sharply usually resulting in a long wick. This sudden and sharp movement occurs usually when some important economic news is released. In most cases, these are the stop loss orders.
Whether a trader is long or short, stop hunting happens when then stop loss order is hit and soon after the trade moves in the opposite positions. Forex stop hunting is obviously the most despised event that retail traders wish not to talk about. There are also numerous conspiracy theories surrounding the forex stop hunting.
However, the fact remains that given the way the markets behave, stop hunting is often a common behavior. There is also a reasonable explanation behind forex stop hunting, which is something we will explore in this article. You have set your stop loss order and you have also defined your target profit level. With forex stop hunting, the trade is triggered but price falls sharply and hits your stop loss order.
This can happen within just a few pips of difference and soon enough, price reverses back and moves in direction that you were anticipating. This triggering of the stop loss order before moving in the expected direction is what is known as stop loss hunting.
Here, we have a EURUSD chart with a long position. The entry price is 1. You can see how price initially dips to 1. Then after a couple of sessions, price action continues to drop below the entry price. Eventually your stop loss is hit. You can see how price dips to 1. However, price quickly pulls back and rises. So now, you are out of your trade but the market continues to move higher and eventually does break beyond your take profit level that you intended.
Forex stop hunting example 1. This is forex stop hunting at its best. Most of the times, forex stop hunting can be seen with the candlesticks itself. Typically, the candlesticks with large wicks are easy to stop.
This is where you can see forex stop hunting at its best. Price posts a sharp gain or decline, only to pull back but not before hitting the stop loss orders. Another example of this phenomenon is shown in the next chart. Forex stop hunting example 2. In the above example 2, one would typically be long on the market given the strong uptrend. Yet you can see how forex stop hunting works as price falls below 1. Despite the candlestick staying bearish, price action continues to push higher.
Forex stop hunting can occur for both long and short positions. Typically round numbers are a good level for stop hunting to occur as it is widely known that most traders set their take profit or stop loss levels near or at the round numbers.
The common prevailing idea is that forex stop hunting occurs because of the broker. Others argue that these are institutional traders who are hunting for the stop orders. There are no genuine facts to back up the claims. Forex stop hunting can occur for a number of reasons. For starters, stop hunting is usually associated with some news or an event that evokes a sharp reaction from the markets.
In such cases, the spreads tend to widen and as a result the stops are triggered. In other cases, the markets can simply chop around until all the stops are hit before reversing direction. Many traders tend to make the mistake of setting their stop loss at a very tight level not giving their trade enough room to breathe. In other cases, the traders simply get unlucky, especially if they set their stop loss at some round number. While forex stop hunting phenomenon is something that occurs on a daily basis, a careful investigation reveals that this is a commonly occurring scenario.
For traders who wish to avoid forex stop hunting, simply stop trading before or right after a news event is released. This will ensure better success with your trade once the markets are settled and the trend is established. Forex Trading School Courses. Novice Level Courses. Advanced Beginner Level Courses. Competent Level Courses. Proficient Level Courses. The Expert Level Courses. What is Forex Stop Hunting? How does forex stop hunting work?
Forex stop hunting example 1 This is forex stop hunting at its best. Forex stop hunting example 2 In the above example 2, one would typically be long on the market given the strong uptrend. Why does forex stop hunting occur? Read times Last modified on Sunday, 27 January Published in Forex Blog - Articles. AllFXBrokers Support. Points: Achievements:. More in this category: � What is a social trading network?
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Stop Loss Hunting by Forex Brokers – What to Do?,What is Forex Stop Hunting?
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The Expert Level Courses. Most of the times, forex stop hunting can be seen with the candlesticks itself. However, you should realize that there is no collective concerted effort to ensure that your position ends up in the red. They can make money through the other ways, but they are not allowed to. Forex Trading School Courses Novice Level Courses Advanced Beginner Level Courses Competent Level Courses Proficient Level Courses The Expert Level Courses. Keep in mind, if you see an area which looks perfect for setting your stop loss, other traders are also very likely thinking the same thing. Unlike most retail traders who are only trading relatively small size, larger market players, such as hedge funds, institutions, and proprietary trading desks rely on large pockets of liquidity in order to efficiently get in and out of the market.
Then almost immediately afterwards the price reverses and moves in your intended direction. They charge you some pips when you buy a currency pair, forex broker hunting. However, it is somehow impossible forex broker hunting prove that it was the broker who increased the spread to hunt the stop loss, unless they do it by increasing the stop loss for tens of pips when there are no news release that causes the spread to go up suddenly. Now that all of our conditions have been met for a potential short set up, where should we place our sell entry order? Avoid Obvious Areas — The more obvious a support or resistance level appears on the chart, the more likely it forex broker hunting to be used as a manipulation zone for liquidity runs. Anyone who has experienced this can vouch for how frustrating it can be when this happens on a trade. You can see how price initially dips to 1.
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