the institutional banks trade actual currency in forex although they trade online right? so with a huge amount of money they can move the market. but for retailers, they just trade CFD and in CFD they buy or sell to the market maker not to another retail trader right? so if I am right to this point and the CFD is a derivative of price and don’t impact on the price then how the market maker moves the price aside from the institutional banks to get the orders of the retail trades or fill their stop and drop them out when the actual move is in the hand of the banks?
You are right that institutions (more than just banks) deal in actual currency. But there is far more activity in the forex market than just institutional trading. The price is moved by overall changes in supply and demand. And that includes, for example, international trade, investments in international assets, foreign acquisitions, etc. Huge amounts of currency being moved around the globe with the banks as intermediaries, all in addition to speculative trading.
The brokers’ prices follow the real market prices but with a different spread between bid/offer. They cannot deviate far from the actual market prices without creating arbitrage opportunities of buying in one market and simultaneously selling at a profit in another.
You are also right that in the main retail traders are not trading real cash. Their counterparty is their broker, not other retail traders (although a broker can match trades to offset overall risk). So the prices offered by the retail broker to their clients are linked to the prices offered to the broker by their liquidity suppliers in the interbank market. They can adjust their own spread but not the price movement in the market. It is the market price that moves either with or against the retail trader’s position.
To a large extent i think it is just an excuse for having lost. At least as far as regulated brokers are concerned.
It is possible that unregulated brokers could widen their spreads and scoop in some close stops.
But the interbank market players are not the direct counterparties of retail trades and are certainly not interested in the small amounts that we trade even if they were. We are invisible to them both physically and mentally.
My personal belief is that stop hunting is a bit of a myth.
I’m sure it happens - but as already suggested it’s a bit of an excuse.
I’ve made many trades over 17 years and while there have been times I’ve been stopped out when I feel I should not have been it’s been probably 20 times at most.
I think the chance of your stop being hit prematurely are higher if you trade intra day for the simple fact the spreads can widen at times.
From what I’ve noticed, if a higher time frame I.e. daily or 4hr is clearly printing a certain direction but price on the 1hr / 15m / ltfs seems to be motionless. Banks and institutions can see this, they will place a trade against bias direction due to low volume in the market, this will liquidate a lot of correct bias positions due to their SL and provide the bank with enough liquidity to place their own trade which will then go in anticipated direction. For example, imagine EURUSD is in a clear down trends it’s just made a LL and has now retraced and formed a LH with a lot of 4hr candle closing with wicks to the upside but price is not pushing down. Banks will enter push price to just above the highest wick before placing their sell trades. A lot of intraday banks / day traders who went short will have their stop loss here, by hitting this, the market is flooded by counterside buy orders (to liquidate these positions), this gives the big bank enough liquidity to place their major sell order and it to get completely filled. 90% of the time after this happens, and a major order has been placed, price will shoot down with huge momentum and not stop
Seems about right, much more forensic response than I could ever provide.
I do notice that the many of the complaints of stop hunting come from the day traders - and most of the times it’s happened to me is when I’ve traded intraday.
It’s often said that you shouldn’t leave your stops at obvious levels, but you could get more obvious levels than where I place my own.
The lesson I think to be drawn is intra day you are going to have many more frustrations than on the slower timeframes.
thank you but it raises another question for me what is the meaning of liquidity itself?
because we as retailers trade CFD’s right? but the banks are trading forex so what does the bank want to do with our CFD liquidity? and what is the liquidity of retailers mean?
I can’t find the link between the liquidity between retailers and the liquidity that banks need for trading
Liquidity just means that there are sufficient market-makers quoting bid/offers constantly to enable the market to flow smoothly and without breaks.
The major banks and some financial institutions make markets by offering both bids and offers. If a particular market has sufficient market-makers to absorb the needs from all buyers and sellers then there is good liquidity.
The retail brokers are able to offer market-making in terms of both bid and offer as long as their liquidity providers are offering them the same.
Some markets in some circumstances might find that there are no bid/offers available or that the spreads between the bid and offer prices is extremely wide. In which case there is little or no liquidity at that point.
It can also be noted that when these market-makers are experiencing a strong bias in either buying or selling then they move their prices accordingly like a moving window. This is how price moves in response to supply/demand at any time.
yes but who is the liquidity provider of the this brokers because banks can’t be right?
banks trade spot forex and retail traders trade CFD’s so retail brokers can’t get their liquidity from banks then how and where is they liquidity ?
thank you in advanced
Yes they can and do!
All the broker needs is a market price, not the money itself. Liquidity is not the money, it is the reliable price availability, that is all. It all works on trust that is backed up by equity reserves. Your broker equity account is your broker’s assurance that you can cover any losses arises from a change in price. If your equity is insufficient you will get a call to add to your account or the open positions will be closed.
The broker relationship with its bank liquidity providers is the same, they are just clients of the bank in the same way.
i understand it so the liquidity of retail traders are just in the smaller environment of the retail world right?
when a trade is going to happen there should be an opposite side so the broker itself could be the opposite side or another trader (if the broker is ndd or stp) so this the liquidity itself in the retail world there isn’t any bank to take the other side of the trade because there is no spot trading in retail world ?
Nearly correct. The broker can often take the other side of your trade as counterparty but not directly with another trader, otherwise whenever you close your trade it would close his too!! Naturally, a broker can offset the overall risk across all its open risk positions, i.e. if he has sold to you and bought from someone else then his risk is neutral until one or other of the positions is closed. In reality, of course, there are many open positions at any one time, but the broker knows its overall exposure risk at any one time.
NDD, ECN, STP trades are passed through to the interbank markets and are a rather different broker model.
You are now getting into the various broker models. There is quite a lot to write in order to describe them and i think it would be easier to search these on internet. Here is one example of an article describing these models, there are others, too:
The brokers do not connect trades direct with other traders as the counterparty to the trade (although they can match opposing positions in their overall net risk exposure) They either take the other side of the trade themselves as counterparty or they pass the trade straight through ECN/STP to the interbank market participants who are making the original prices for the broker. The broker then adds on his own spread or charges a commission but is not the counterparty to your trade.
But even market-maker brokers acting as counterparties will need the option to pass certain trades or offsetting positions to the interbank market via their liquidity providers.
Brokers are just intermediaries in all this between the institutional markets and the retail markets, except where they decide to act themselves as counterparties.
oooooo I see it’s so brighter for me now thank you so much
but just one thing excuse me if I can’t get it but I just can’t it’s so illogical for me let me just ask it in one sentence so with all the definitions that you made how interbank make the other side of our trade the banks don’t trade like us the market maker do right?
please don’t smash your keyborad
The cash interbank market is one product. The liquidity provider market for brokers is another. Suffice to say that in a simplistic way the liquidity providers service to the broker is the same in concept as a market-maker broker service is for the retail trader.
Our market is just a shadow of the cash interbank market, joined to its heels via the LP interface.
How trades are logged, reconciled and cleared on the LP/broker interface is not really our concern. Our only point of interest is what model our broker uses as described in that link in the post above. There is a lot of info about the pros and cons of various broker models on internet.
