Stop hunting?

Beginner Questions
1

So, the common thought seems to be that brokers/market makers hunt stops and to protect yourself you should place your stop a bit further than where you think because they are hunting the average place people place their stops. This is because all your money goes to the broker and is never actually placed on the forex interbank market.
Do brokers actually do this or is this a method drummed up by losing traders?

Why wouldn’t the broker just underwrite your bet in the market and make all their money off the spread? They don’t want to lose your account do they.

Counter argument: Forex is popular at the moment and 95% of all new traders lose so while the punters keep coming in, they can keep stop hunting.

With spread betting, the standard spiel they give is that when you go long, they go short to underwrite the bet, therefore making all their money off the spread only.

2

SanMiguel, you’ve been here long enough to separate out the cobblers from the truth:
Individual brokers hunting your stop - manipulating price just to stop you out? Rare and mostly BS. 100% BS on here at any rate.
Underlying market moving price to stop out billions of $$ of stops at obvious levels. Sometimes.

3

But do brokers underwrite your longs and shorts? They don’t want to lose money. Either that or they rely on 95% of their clients losing.
If one of their clients was to put in plenty of lost they would have to underwrite it to protect themselves?
Underwriting I have no problem with because they make their money off the spread…absolutely fine - that is their service charge essentially.

4

To a degree. They aggregate their net position, and offset that in the underlying market within their risk parameters.

What that means in reality, say they’re 5% net long after matching all longs and shorts. Internally they’ll have risk controls that will say anything over 10% they must offset in the market. Lower than that 10%, they usually allow some leeway so they might or might not offset their 5%.

Sometimes they get it massively wrong - see IGIndex a few years back - didn’t offset their positions properly and lost millions. Losers don’t always lose…

5

The real question should be: When you set automatic SL’s do they get reached quite often and then reverse back to your TP anyway?

This is regardless of why it is happening, because we can never know for certain if there is stop hunting going on who is doing it.

I just use an, “O crap SL,” and set alarms before where I actually want to stop out. As per nickB’s method I want to be able to watch price action at my SL and decide if I should get out or if it’s likely to go my way.

6

So say you wanted a 50 pip SL, you would set it at -100 but actually decide whether to close the trade out at -50 or not?

7

Right now I’m trading GBP/JPY, as per nickb’s method my, “o crap SL,” is 70 pips, which is part of the ATR. Because I only want to take -50, but -70 would be the absolute limit I want to take, I wouldn’t put it at -100 because although it hasn’t jumped quickly past -70 on any of my trades, I want to make sure I don’t lose more than -70. -100, would wipe out two previous wins.

I would consider hanging on past -70 just hoping and preying. To keep profits intact, you have to cut losses at a certain point and admit the trade isn’t going well. Make sure when you’re judging price action, you aren’t seeing something that isn’t there.

I only put a hard SL in place if I’m away from the computer and can’t watch it. I have two computers and a good internet connection, so it’s unlikely everything is going to go down and I can’t get back in from entry to -70.

8

So, say you trade a 2% risk per trade. Will the 2% be for the 70 pip loss or the 50 pip loss? :slight_smile:

9

Sorry to butt in here but can you actually run the same forex trading program on 2 computers at once?

I take it that you use the same password for each computer.

Will a trade placed on computer A show up on computer B?

Or is it possible to place a contradictory trade on computer B and confuse the whole system? :smiley: :stuck_out_tongue:

Meanwhile [B]SanMiguel[/B] awaits the answer to his question. :smiley:

10

The 2% is on -50 -70 is the, “o crap, I’m not there, or I’m worried about price action, or there is a storm and my connection could go down, SL.”

I can log in on two different computers into the same account. Yes, I’ll see any trades placed, since it is the same account. Since it is the same account I can’t put in both a long and short on the same pair, as per IBFX hedging policy.

IBFX does have a new thing in place for people who want to hedge, basically managing multiple accounts at once. I don’t hedge or straddle, so I’m not worried about it. I work one trade at a time.

11

Individual brokers hunting your stop - manipulating price just to stop you out? Rare and mostly BS. 100% BS on here at any rate.

I disagree. when you place a trade with a retail broker for the most part it never sees the true interbank market and also the price you see is your retail market makers pirce feed. So do they control the price of course they do. there are in the businss of making money. they won’t search for your personal stop loss but they do hit areas where stop losses would be built up for example 2 pips past the last candles high or low. Trust me they are multimillion dollar operations and they are making alot of money off of our losses.

Also I would add that if you are willing to risk 2% and you have figured that out to be 50 pips, if you put your stop loss at 70 pips that is 40% larger of a stop loss and therefore nearly 3% of your equity. it matters in the long run but if you are there to manually close the trade at -50 than i suppose it is fine, it really depends on your comfort level.

final thought on this is your broker is not your friend you should not place to much trust in them. im not saying they are shady im simply saying we are all responsible for our trades and as such we should always remain vigilant.

12

So far, this thread seems to be concerned only with stop hunting at the retail broker level. But, retail brokers are just one of three groups engaged in stop hunting in the forex market. The other two operate at the interbank level, and they are (1) the banks, themselves, and (2) major speculative interests (other than retail brokers) transacting trades directly with those banks.

[B]The Big Banks[/B]

You, the retail forex customer, are at the bottom of the forex food-chain. One step above you, in the middle of the food-chain, is your broker. At the top of the food-chain is a big bank, or several big banks, which are part of the interbank network. If your account is with DinkyFX, Dinky might be affiliated with only one bank. If your account is with a major retail broker, that broker might be affiliated with a dozen big banks. Worldwide, there are about 100 major banks which make up the interbank network.

These banks trade with each other, and with a host of large customers. And they are [U]not[/U] in the business of simply matching orders and collecting spreads; a major portion of their business is trading — just like you’re doing, except round-the-clock, on an enormous scale, with a large cadre of sharp traders.

Deutsche Bank, and UBS, and Barclays all have trading desks manned by traders (not order-takers) who are constantly on the hunt for profits. And they will go gunning for clusters of stops in a heartbeat. These traders do not operate in a vacuum. They see each other’s Bid and Ask prices, because they trade with each other. At the first sign that one bank is taking a run at a cluster of stops, all the other banks will pile on. One bank’s trade might last 5 seconds, and net 5 pips — but, with $100 million in play, that trade would be worth $50,000 in gross profit to the bank.

If you have forgotten the kind of clout that bank traders can wield, re-read the history of Nick Leeson and Barings Bank:
Nick Leeson - Wikipedia, the free encyclopedia

[B]The Big Speculators[/B]

There are other heavy-hitters operating at the interbank level, besides the banks themselves. They are the large customers of these banks, including multi-national corporations, large hedge funds, sovereign wealth funds, smaller banks, and securities dealers and brokers. Some of these large customers engage in the same kind of speculation, including stop hunting, that the big banks engage in. And, it’s hard to believe that they do not act in concert with each other, and with the banks through which they trade.

If that sounds conspiratorial to you, then you might be inclined to blame their stop hunting on your broker, instead. But, even if your broker is the largest broker on the planet, I don’t think he has the clout to move any of the major currency pairs by 10 or 15 pips in a stop-hunting attack.
[B]
If You Can’t Fight Them, Join Them[/B]

Instead of being the hunted, why not be the hunter? Boris Schlossberg wrote a piece in Investopedia about how to tag along with the stop hunters at key price levels, and I can tell you that I have tried this, and it works. Here’s a quote from the article:

“Although it may have negative connotations to some readers, stop hunting is a legitimate form of trading. It is nothing more than the art of flushing the losing players out of the market. In forex-speak they are known as [I]weak longs[/I] or [I]weak shorts[/I]. Much like a strong poker player may take out less capable opponents by raising stakes and “buying the pot”, large speculative players (like investment banks, hedge funds and money center banks) like to gun stops in the hope of generating further directional momentum. In fact, the practice is so common in FX that any trader unaware of these price dynamics will probably suffer unnecessary losses.”

If you want to read the rest of the article, go to: Stop Hunting With The Big Players

Clint

13

Good stuff as you always post [B]Clint[/B]!! :slight_smile: :slight_smile: :slight_smile:

14

Interesting article - thanks for that.
However, I am not clear on why there would be stops at these round number regions.
For example, with the first example, EURUSD at 1.2700 - why would there be any longs at that random point?! In this case, the method relies on traders having gone long at around the 1.2715 region with their stop at 1.2700 being hit and initiating a sell of their trade.

I’m sure it could be modified for well known S&R zones but there you have the problem that it is an actual S&R zone so might not move past the zone at all.

15

The answer to your question involves what is generally referred to as the [B]theory of large round numbers[/B]. This theory applies in most areas of life, from the way shoppers react to retail prices in stores, to the way investors unconsciously react to certain price levels in financial markets.

There’s a reason why retail items are priced at $99.95 instead of $100. And there’s a reason why traders react differently to a price of 1.3600 as opposed to a price of, say, 1.3621.

Back in the late 1960’s, 1000 on the DJIA was a HUGE resistance level, simply because it was such a glaringly large round number. The Dow had never HELD above 1000, and many traders thought that 1000 was the ultimate limit, never to be exceeded.

Today, spot gold is imitating the Dow at 1000, simply because $1,000 per troy ounce is a big scary number, which gold has never HELD above.

When the Dow finally conquered the 1000 resistance level, 1000 became a powerful support level. And, I expect that when gold finally conquers the $1,000 level (by holding above that level for a credible period of time), then $1,000 will become a powerful support level, as well.

Regarding the forex market, here are three excerpts from an article (which I will link to, in a moment):

“Then there are psychologically important levels. These areas might not have a clear representation as most recent support or resistance zones, but have importance because of other reasons. Probably best known of these are round numbers, also known as “the figures”. Examples of round number are 1.5600 in EUR-USD, or 107.00 in USD-JPY.”

“Why are those areas psychologically important levels? Market participants as a whole tend to put conditional orders near or around the same levels. While stop-loss orders are usually placed just beyond the round numbers, traders will group their take-profit orders at the round number. As a result, take-profit orders have a very high tendency of being placed at full “figure” level.”

“It is believed that large banks with access to conditional order flow, like stops and limits, actively seek to exploit these zones. So, a strategy of fading round numbers attempts to put traders on the same side as market makers or the ‘smart money’”.

Note that the “fading” strategy that this author is talking about is not the same strategy Boris Schlossberg outlined.

Here are three articles you might find helpful on the subject of large round numbers in forex trading:

Large Round Figures - Forex Trading, Currency Forecast, FX Trading Signal, Forex Training Course, Education, Tutorial, FX Book, Forex ebook, Learn to Trade Forex, FX Guide, Pivot Points, Currency Rates, Forex Secret, Forex Brokers, Currency Trading S

Dow 8000: The Psychology of Round Numbers at SmartMoney.com

Possible Error Detected ----note: go ahead and click this link; it works fine.

Clint

16

Hi Clint, great post, I will have a read through those.
However, I misframed my question.
If you look at the example here:
Stop Hunting With The Big Players

Note that on June 8, 2006 the EUR/USD is trading well below its 200 SMA, indicating that the pair is in a strong downtrend (Figure 1). As prices approach the 1.2700 level from the downside, the trader would initiate a short the moment price crosses the 1.2715 level, putting a stop 15 points above the entry at 1.2730. In this particular example, the downside momentum is extremely strong as traders gun stops at the 1.2700 level within the hour. The first half of the trade is exited at 1.2700 for a 15-point profit and the second half is exited at 1.2685 generating 45 points of reward for only 30 points of risk.

The trader shorts at 1.2730.
It seems the strategy does not rely on stop hunting existing trades but rather placed orders also to go short.
If there were buyers waiting at the 1.2700 level, the price would have stalled and possibly bounced back upwards, which it did not.
Stop hunting of existing trades would rely on hitting trades of the opposite nature.
If you are short, you/banks want to hit people that have gone long therefore forcing their BUY position to be closed and in effect becoming a SELL pushing the price further down.

Hence the spikes through support and resistance zones. At a support zone spikes through the support zone are pushed to hit stop losses on longs…therefore initiating closes/buys from those traders. The banks then pick up this dead money on the way back up from the support zone.

17

In the example given in the Schlossberg article, price is plunging from 1.2750 to 1.2650. We might look at that and say that everyone was selling. But, obviously, for every seller there has to be a buyer; so, half the participants in the market during this plunge were buyers.

What were the buyers expecting? Most certainly the buyers at 1.2750 were not expecting the price to plunge to 1.2650. They were expecting the price to head higher; but, they protected themselves with stop loss orders (sell-stop orders) somewhere below their entry prices. The theory of large round numbers tells us that many of these buyers would look at 1.2700 as probable strong support, and would place their stop loss orders just below this price. These sell stops are what the stop hunters are gunning for. If the stop hunters are successful, and these sell stops are hit, then they reinforce the plunge in price, driving it down even further, and giving the stop hunters the opportunity to exit with their profits.

The Schlossberg strategy, in this case, is not based on the assumption that this price plunge will continue to the 1.2650 level. Rather, it assumes that 1.2700 may, in fact, be significant support. But, by applying enough selling pressure between 1.2715 and 1.2700, the stop hunters can drive the price below this support level, clean out a ton of stops, and exit their positions before the price returns to 1.2700.

Clearly, in order to drive the price below 1.2700, the stop hunters need to apply enough selling pressure to overwhelm whatever buy orders might be waiting at the 1.2700 level. There would be two distinct types of buy orders at the 1.2700 level: take-profit orders (to close profitable short positions), and entry orders (to open new long positions). These orders represent the support that the stop hunters have to break through, in order to hit the stops they are gunning for.

By the way, just two minor corrections:

You said, “The trader shorts at 1.2730”. Actually, the trader shorts at 1.2715, with a stop at 1.2730, and places take-profit orders at 1.2700 and 1.2685.

And Schlossberg said, “As prices approach the 1.2700 level from the downside …” He meant to say ‘As prices approach the 1.2700 level from above …’

Clint

18

JK, interbank price feeds are pretty easy to come by these days, and I have never seen a discrepancy of more than 2 or 3 pips. But if anyone knows of any single broker manipulating price like this, please, please, please let me know :wink:

19

Cool - thanks.
Now, has anyone actually tried this method and is profitable with it it or is it just one of those theory things that works in principle?
I for sure wouldn’t enter a trade at a round number level just because it was a round number, I’d see what the price had done recently, where the S&R points were, and which way the trend was.

20

I’ve done it before, but only once.

In Oct 2008 GBP/JPY broke 150.00 for the first time in almost a decade.

I went short at 149.95. I got over 200 pips in less than one minute, and that’s after the 80 pips of slippage I got because things were moving so fast! Prices continued to fall over the next hour for a total of 1000+ pips.

It really does work in practice, but I’d only do it on major levels like 1.0000 or 1.5000, and only if they haven’t been broken recently.