Do Forex Brokers Hunt Your Stop Losses?

Hi Everyone,

In this video I will explain stop hunting and who is doing it;

If you’re not familiar with stop hunting it’s basically where you place a position on a trade with a stop loss, then the market will trend down take you out and then go back in the original direction which you had been hoping for.

For example if you place a trade knowing that it’s going to trend up, put on your position but observe the market quickly spike down take out your stop loss, take you out of the trade for a loss and then return in the original direction.

A lot of traders get very frustrated about this and it is something that does happen I’ve witnessed it happen several times and it’s happened to me. A lot of retail traders think stop hunting is done by brokers; what they think is that the brokers can see where your position, can see you stop loss is then widen the spreads a little and take you out and pocket the cash.

In reality that is a myth, there may be some unscrupulous brokers in some far flung corner of the world that do practice that, however generally mainstream brokers that are regulated will not, it is very very rare. There are however some people out there that are actively hunting your stops but it’s not your broker.

First things first, why wouldn’t the broker do it; well if we think about it in the brokers best interest for you to be trading profitably. Bear in mind that every time you make a profitable trade they get commission, to simplify it every time you take a trade the broker takes a pip or a fraction of the spread. If you are a very good trader who makes regular, consistent profits in the market, each time you take a trade, that broker makes a commission either directly or by adding a little bit onto your spread. This means, therefore, that the more you trade, the more they make, and this gets more infinite as your account balance grows and your position size increases. To put it another way, they make far more over time from the good traders than they do from the bad ones. They also get the money from the bad ones anyway, as they over- leverage and over -trade.

Quite simply, it is in the broker’s best interest to stay away and let each trader go their own course; because ultimately, they will make money either way.

With that in mind; who is responsible, well the reason that stop hunting happens is because large funds such as hedge funds and large institutional traders have to find buy orders to match their sell orders and this is where they hunt your stops, so to speak.

To better understand this, we need to develop a deeper insight into how the larger institutions operate and how their operations affect our trading plans. The distinction here is purely down to trade size; so even though I was trading millions of dollars at the height of my fund trading career, I was still considered a ‘tiny fish’ in the same pool as the retail clients trading their own micro-accounts.

When looking for trading opportunities, the whole basis of our operation is to calculate which way the market might go next. More importantly, we need to time it stringently so that we enter the market in that direction as it starts taking off.

This is known as the ‘Perfect Trade’.

A large institution such as a bank, on the other hand, will significantly differ in the way that they trade. These are the players creating the moves and thus they have to time things completely differently.

Now, imagine that you are a large bank and that you have previously bought into the market and the market has now rallied so that you are in profit. The problem for you is that when you engage the market, you move it. This means that when you click ‘buy’, the price almost always goes up, until your order can be satisfied with enough sellers. This, of course, ends up giving you a worse price. This is called ‘slippage’, and is a big issue for large scale traders.

Another major issue is that of taking profits. Just like ‘slippage’, the same rules apply; if you just dump your position, the market is likely to revert against you (when closing a ‘buy’ order, you must sell it back to the market and that short, can push the price back down towards your entry point, wiping out some of the profits).

It’s a troubling problem as I’m sure you’ll agree.

So the question is; how do large players exit their positions whilst ensuring that they do not push the price against themselves?

The answer is, of course, ‘stop hunting’!

Here is an example:

The Large Player (LP) is long in position and wants to exit and take their profits.

The price is just below a level of strong resistance and the LP can see that there is likely to be a lot of traders placing Sell Orders at that level. In anticipation of the price moving down from that level, they can also see any orders that are placed on their books at these areas; providing further confirmation of pools of liquidity being present.

Additionally, the LP now knows that there is likely to be a nice big pool of Stop Loss Orders just above that level of resistance. This is where those traders will be cutting their losses in the event of the resistance failing to push price down.

These Stop Losses will of course, be Buying Orders.

Remember, the LP wants to sell their position back to the market so in order to do this (and to avoid pushing the price back down against themselves), they need enough buyers at a single price.

The pool of Stop Loss Orders (Buying Orders) is perfect for this.

The LP then calculates the cost of slightly pushing the price up, through the resistance level to the pool of Stop Loss Orders. Then, if it’s cost effective to do so, the LP forces the price to spike up into the orders. Here, they close their main position and due to their order size, avoid the price coming down.

As retail traders, we see these spikes, take out our stops and then drop in our intended direction and immediately get annoyed and think there is a conspiracy to get us. The truth is that there is a conspiracy; but it’s not personal and it’s usually the larger traders and not your broker working against you in this manner.

Hi Torulf,

Thanks for an illuminating post!

I always think that the term “stop-hunting” is a bit melodramatic for the exact reasons you have discussed; I prefer to think that larger participants “seek liquidity”.

In a strange sort way, I think this is still the case if you take the large participant out of the market and replace them with lots of smaller traders and a net directional bias - there’s no conscious calculation there, but price will gravitate towards the liquidity.

This can form the basis of a short term strategy . . . it’s generally done algorithmically and you’ll need the following:

  1. A market that is not very liquid.
  2. Depth of book at each price tier.
  3. Volume at bid and volume at ask.
  4. Delta of 3 above.

Essentially, what you’d be looking for in a short entry is the following scenario:

  1. In a falling market, price makes a new low, and then begins to rise.
  2. A number of traders try to “buy the bottom” - you’re looking for a positive cumulative delta following the low, as impatient traders chase price higher with market orders.
  3. Price begins to fall again. As it does so, cumulative delta must remain positive - this is indicating that there are still traders with long positions that they have not yet liquidated. They are now sitting on a loss, and if price continues to fall it will trade through their (sell) stop.

The idea is to enter short just above these sell stops, and to exit once price has traded through them (which it should do very quickly) - what you’re looking at is an algorithmic form of front-running, where your knowledge about other participant’s orders is an estimation rather than a certainty.

To make this viable you need quite a bit more information than the simple outline I have given. For example, how do you know the buyers have stops in the market? Maybe they were hedging, maybe they were exiting a short position, maybe they were establishing a long term position and are indifferent to any small adverse excursion . . . How do you know exactly where these stops are clustered? Often, a couple of ticks below the low, but not always . . . How do you know whether you’re looking at long positions put on mostly by poorly funded retail traders who have tight stop-losses in obvious places - lower volume days where there appears to be little interest from institutions can be a good indication, but there are no guarantees . . . You’ll need to automate all this to model it successfully, and accept that it doesn’t always work out, of course!

Currency futures are often better than the spot FX market for this, as unless your broker is no-dealing-desk ECN you won’t see depth of book and the volume information that you need, and currency futures are more thinly traded, meaning that these stop-runs can be more explosive.

Hope that gives some of you scalpers and daytraders some ideas to explore!



Forex brokers can definitely do what ever they want with your trade. Does you broker doing that it’s hard to tell, even harder to do something about that.