EURUSD fakeout?

[forexyt]

Hi skalpist, thanks for your reply.

This is an ‘Aha’ moment for me. I think I have finally got a better grasp of how stop hunting is done.

Just to confirm that I have understood you. Let me continue to use my earlier example for discussion:
(a) My intention is to push price down to below 1.3000 so as to trigger those Stop Loss orders in the range of 1.2980 to 1.2999, which I already ‘knew’ exist.

(b) So I keep selling to meet all the bid orders in the market. As long as I keep doing this, bid orders will be filled, and price will start to fall. If I have enough financial power, I will be able to push price down to my desired level of below 1.3000.

© When price has actually reached 1.2999, more and more Stop Loss orders will be triggered, resulting in a Sell momentum of its own. At this point, I can start to close my Short positions, using the retail traders’ Stop Loss orders as my Take Profit targets. When most of the Stop Loss orders have been hit (and also meaning my Take Profits have been met), the price will start to range or move in its trend - Up.

(d) I have succeeded in “Stop hunting” at the expense of retail traders, who could only feel frustrated because the price starts to move Up above their their Stop Losses!

Please let me know if my general idea of outlined above is wrong.

Now, assuming that what I wrote above is generally correct, then I am curious on some aspects of the operation:
(1) Exactly how do institutional traders ‘know’ where are Stop Losses clustered? Because they know traders like to use round numbers as Stop Losses? Or because they know traders like to put Stop Losses above/below recent high/low? Or because they have insider information?

(2) For Step (b) to work, my financial strength must be extremely strong. Otherwise, how could I keep selling to push price down? Or are such operations always done by groups of institutional traders working in close cooperation with each other?

(3) Stop Hunting also seems to be a risky operation. Using the above example again, let’s say I keep selling and manage to push the price down to 1.3005, very near to my target of Stop Loss orders below 1.3000. However, suddenly another group of institutional traders comes into the market and start buying aggressively. Price then starts to range . Or worse, the price could actually start to move UP quickly! I must be nimble and exit from my large open positions as soon as possible, otherwise I could end up with large losses if price increases relentlessly due to the sudden buying from other institutional traders. Is this a possibility?

Regards.

It is done by buying (or selling) more than there are current bids/asks for. That will push the currency pair in their desired direction. As stops are hit, that accellerates the “new” direction. Generally, as soon as stops are hit these institutionals will start to “peel out” of their large open position, using the triggering stops to keep the pair moving while still allowing them to exit.

HTH

[Skalpist]

You have it exactly correct. Now, let throw another “log on the fire” of the stop hunting thing.

Generally, the amount of money that it takes to actually stop hunt is MORE than can be earned … the stops are all triggered and the institutional still has quite a large open position.

Except for one thing. Pushing a currency like that tends to give most technical analysis systems the false belief of an actual trend change.

Therefore, retail traders, typically trading in a “technical analysis only” fashion begin placing orders in that direction, complete with new stops.

Now, the instututional, fully closes out of the still open position, then adds in just a little more money … and then you get a second bounce back in the direction of the original trend and still more stops get closed in the favor of the instutional.

So, the retail trader takes an absolute blood bath while the instutional trader laughs all the way to the bank.

That is part of the reason why I say it is so important to know what the fundamentals are, and when a currency bounces and moves counter to the direction the fundamentals say a currency should be moving to hold off on new trades.

Trading using ONLY technical analysis is why retail traders get beat up.

Take a look at the movement of EURUSD (1 hour chart) the last couple of days for an example of what I’m talking about here.

Hi skalpist, thanks for your reply.

This is an ‘Aha’ moment for me. I think I have finally got a better grasp of how stop hunting is done.

Just to confirm that I have understood you. Let me continue to use my earlier example for discussion:
(a) My intention is to push price down to below 1.3000 so as to trigger those Stop Loss orders in the range of 1.2980 to 1.2999, which I already ‘knew’ exist.

(b) So I keep selling to meet all the bid orders in the market. As long as I keep doing this, bid orders will be filled, and price will start to fall. If I have enough financial power, I will be able to push price down to my desired level of below 1.3000.

© When price has actually reached 1.2999, more and more Stop Loss orders will be triggered, resulting in a Sell momentum of its own. At this point, I can start to close my Short positions, using the retail traders’ Stop Loss orders as my Take Profit targets. When most of the Stop Loss orders have been hit (and also meaning my Take Profits have been met), the price will start to range or move in its trend - Up.

(d) I have succeeded in “Stop hunting” at the expense of retail traders, who could only feel frustrated because the price starts to move Up above their their Stop Losses!

Please let me know if my general idea of outlined above is wrong.

Now, assuming that what I wrote above is generally correct, then I am curious on some aspects of the operation:
(1) Exactly how do institutional traders ‘know’ where are Stop Losses clustered? Because they know traders like to use round numbers as Stop Losses? Or because they know traders like to put Stop Losses above/below recent high/low? Or because they have insider information?

(2) For Step (b) to work, my financial strength must be extremely strong. Otherwise, how could I keep selling to push price down? Or are such operations always done by groups of institutional traders working in close cooperation with each other?

(3) Stop Hunting also seems to be a risky operation. Using the above example again, let’s say I keep selling and manage to push the price down to 1.3005, very near to my target of Stop Loss orders below 1.3000. However, suddenly another group of institutional traders comes into the market and start buying aggressively. Price then starts to range . Or worse, the price could actually start to move UP quickly! I must be nimble and exit from my large open positions as soon as possible, otherwise I could end up with large losses if price increases relentlessly due to the sudden buying from other institutional traders. Is this a possibility?

Regards.

[Skalpist]

(1) Exactly how do institutional traders ‘know’ where are Stop Losses clustered? Because they know traders like to use round numbers as Stop Losses? Or because they know traders like to put Stop Losses above/below recent high/low? Or because they have insider information?

Yes, they get data relating to open orders and their SL’s that retail traders can’t get … and even if you could the volume and format of the data would make it nearly impossible for you to make intelligent use of it.

(2) For Step (b) to work, my financial strength must be extremely strong. Otherwise, how could I keep selling to push price down? Or are such operations always done by groups of institutional traders working in close cooperation with each other?

You are correct, your financial strength has to be measure in the BILLIONS of dollars in USEABLE money. Not even FXCM, one of the largest retail brokers on the planet, has enough cash to stop hunt. Oanda and most others can’t even begin to hope to stop hunt legally. Only DBFX has enough and that’s because they are much more than just a retail forex broker (large retail bank, large institutional bank … etc. DBFX is a unit of Deutche Bank Germany’s largest bank).

(3) Stop Hunting also seems to be a risky operation. Using the above example again, let’s say I keep selling and manage to push the price down to 1.3005, very near to my target of Stop Loss orders below 1.3000. However, suddenly another group of institutional traders comes into the market and start buying aggressively. Price then starts to range . Or worse, the price could actually start to move UP quickly! I must be nimble and exit from my large open positions as soon as possible, otherwise I could end up with large losses if price increases relentlessly due to the sudden buying from other institutional traders. Is this a possibility?

It is somewhat risky yes. But because of the information and data relating to order flow that institutional traders get, much less risky than you might think.

[forexyt]

Skalpist, thank you for your detailed explanation.

I have now finally got a proper picture of how institutional players Stop Hunt [U]legally[/U].

When I started learning Forex, I have been hearing and reading about this “unethical” activity of Stop Hunting. But I could not recall anyone who is able/willing to put down in plain English the exact mechanism of how it is done.

Your have solved one of those great mysteries that has made me very curious :).

[d-pip]

One more issue to think about. In an OTC market no one can tell who are the buyers and sellers of orders. So an institutional trader can not only keep selling the currency pair in an effort to move the price, they can also be the buyers and sellers of their own orders and not be as concerned with the action of the other buyers/sellers.

In other words an institutional trader can place an order higher than the current price, then buy their own order, place another order at a higher price and again buy their own order�…buying and selling their own orders over and over again�…nudging the price in their favor.

With electronic computerized trading it can all be done on auto pilot. Goldman Sachs is known for having a extremely profitable computerized propriety trading desk. I’ll bet they can nudge prices up or down a pip or two…LOL!

If you get a chance read about the role the specialists play in �maintaining an orderly market� on the New York stock exchange, and how important their role is. It seems to me that the large banks have figured out how to �maintain market order� on the OTC currency market without specialists. Watch how often the EUR/USD lands on a big number �00 25 50 50 100� at the close of the hour!!!

PS NYSE specialists are also allowed to hunt for and clear out stop orders