You’d think that after all these years, people would stop complaining about “stop loss hunting” in Forex.
Not yours exactly but the bulk of stop loss orders that their clients have placed.
Years ago in the days of the bucket shops, Forex brokers could actually change the price of the currency quote causing all kinds of havoc in their market.
With regulation like it is these days that type of activity is rare but may still happen depending on where you hold your trading account.
These days, traders will often see sharp spikes in the spread cost and this can easily rip a trader out of their position via their stop loss being triggered.
A spread is the difference between the bid and the ask price of a security or asset.
Spread cost spikes usually take place during thin markets and during news events like FOCM.
Before we get to the truth about stop loss running, let’s take a look at how it can occur:
- Brokers/institutions will wait for price to hit the resistance level (as an example)
- They will enter a large order to push prices up past that resistance level.
- This will cause the market to shoot up past that resistance level.
- All those traders who have their stop loss a few pips above the resistance level will get stopped out.
- Also there will also be lots of buy stop orders just above the resistance level…these are traders who are hoping for a breakout of the resistance level to the upside. Their buy stop orders will also get activated.
- A massive sell order will be placed by the big Forex players and this will push the prices lower.
- Now those traders who had their buy stop orders are now heading for the exits. This also helps to push prices down.
When traders start to see momentum to the downside, short players start to jump into the market fueling the move back down.
Stop Loss Running Equals Order Flow
The markets seek orders. Without new orders in the market, price will be at a virtual standstill. Stop loss orders sitting in the market are resting orders and when they get hit, it creates order flow.
Resting stop loss orders are actually converted to a market order when triggered. We all know that market orders have the risk of slippage and this is why you’ve had worse exits than your stop loss price.
Even better for those with the bigger trading capital, triggered stops can allow the them to get a better average price on their overall position. These big Forex players have huge orders that need to get filled, when they initiate it.
When they initiate a position, a substantial order needs to be filled and price can easily go against them – this comes as they create a large imbalance in the supply and demand. You’ve heard of “accumulation” in the market? This is where larger players scale into positions and try to not move price too far until they are fully committed to their position.
This is why accumulation is a range…..but there are signs of this occurring.
Hate the player not the game?
There is a way you can get on board with these bigger traders and I will cover that later in this post. Astute traders that understand price action already know this!
Your Stop Loss Is A Flashing Welcome Sign
Far too many retail Forex traders place a tight stop. They do this because their trading account is not of size and tight stop loss placement allows a larger position size. That puts them at risk of stop loss hunting.
When traders enter a trade, most will place a stop loss. These stop losses are placed generally around:
- recent highs and lows
- fibonacci levels
- above resistance and below support levels
- just above/below trend lines
Remember this important point: the Forex market moves if there is liquidity. The less liquidity there is, the market does not move at all.
So what these big players want is liquidity and so they need a location where they will be capable of filling orders with zero to minimal slippage.When they want to initiate these massive order, they need to run up price/run down price to these levels of accumulated stop loss orders and running the stops. This will help them fill their large positions.
How are they going to do that?
Not only do they know the common areas where stop losses are gathered (so do you!), they have the money to push price right through those levels.
INSTITUTIONAL TRADERS ENGINEER STOP LOSS HUNTING
Lets say a big Forex trader is trying to sell EURUSD and it has a massive order to fill. Lets say that EURUSD is now almost near a big resistance level.
Let’s not forget there will also be lots of traders still sitting on the sidelines waiting to see what happens on that resistance line.
Those looking for a break of resistance (breakout traders) will take a position on the break and set their stop loss order below resistance (now potential support).
The failure of the price to remain or close above the resistance level will give confidence to the short players. Remember, the big money wants to short!
- Those who went short early at resistance have price run against them to the upside. Stops triggered fueling up move
- Those who traded the breakout see their positions in profit
- Big money shorts at a higher price and price begins to drop
- Those who were long now see their stops get hit which fuels the down move
- Those early shorts who were “stop loss hunted” now climb back in and add more fuel to the down move.
As an individual, you weren’t hunted by the stop loss hunter. What happened is the natural evolution of price and instead of complaining about it, you must take steps to avoid it and even better, profit from it.
How To Avoid Stop Loss Hunting
The short answer is to avoid placing your stop in zones that are magnets for price.
The first method to avoid seeing your stop loss hit, your broker making money, and to avoid the frustration of seeing price go in your direction……
Stop placing your stop loss order:
- Around pivot levels
- Fibonacci levels – they hold no special meaning
- Around trend lines
- A few pips above and below resistance and support zone
Simple enough but that does not answer the question of where to place your stop loss order
I have been a fan of using the Average True Range (ATR) indicator for stop loss placement for a long time
Using the ATR to place your stop loss will keep your stop out of the moment to moment noise of the market. It will usually keep you a safer distance away from pivot levels (depending on your swing trading strategy) and it takes into account the recent volatility of the Forex pairs you are trading.
Yes, you may have to put on a smaller position size to keep your risk in check but that’s the price you pay for having a small trading account.
Capitalize On Stop Loss Hunting
There is a way you can get your position on around the time the bigger traders do. I personally use what is called a failure test setup to not only benefit from stop loss hunting but also to get a position on during accumulation.
Check out this video to see how to do it.