Last month month I've been talking about some reasons why Forex Brokers are not hunting your stop and that blog post has become very popular and got a lot of interest among Dukascopy Community members, receiving only good feedback. In the first part of the article I'm going to cover this subject: "Does Your Broker Hunt Your Stop Loss" and in the second part I'm going to talk about what it really means stop
hunting
and how you can also profit from this action.

Does Your Broker Hunt Your Stop Loss?

Many aspiring new trader are very confused about this subject. You'll see this subject popping up on trading forums on a daily basis by novice traders who blame anyone else except themselves for their bad trades and losses. Many new traders and even traders who are in this business for years have this flawed idea that somehow your Broker hunts your SL order. So, Does your Broker hunt your stop loss?

The short answer to this question is : NO, they don't!

It's very risky for a Broker to push the market with artificial pricing to trigger your stop loss because they will be caught in very advantageous arbitrage opportunities and secondly they will have several legal repercussions and penalties. In my opinion there are two possibilities on how broker may hunt your SL and each of this options is very dangerous for a Broker to engage in and that's the reason why you'll NOT see this happening.

First case scenario is when the Broker is pushing artificial price JUST to your feed in order to hit your stop loss. It's very easy to see the Broker's benefits from this action but if you take in consideration the real RISK the Broker expose himself you will see that it's just not worth to engage with this tactics. The Real risk is the Broker can lose their license if they're caught doing this practices and soon they will be out of business. It's very easy to compare your data feed with another trader's data feed from the same Broker, and see the discrepancy between the price.

The second case scenario would be when the Broker send artificial price to all their clients. But if you're going to take in consideration the real risk you'll understand why they will not engage in this tactics. Actually if a Broker is doing this, it will be caught in very advantageous arbitrage opportunities that can be exploited and they wouldn't be able the hedge their exposure. I hope by now it's very clear why this idea that somehow your Broker is here to hunt your SL is so flawed.

  • What is Stop Hunting?
Now I'm going to cover this subject and give you some solid foundation of WHY? you'll see so often price hitting your stop loss order and than the market reverse. The Forex market speculation is a zero sum game and this mean that for every dollar one trader profits, another trader must lose. In order to make consistent profits, you'll have to think and act like an order flow dealers.

You can have the best trading idea but if you can't find a counterparty to take the other side of your trade you'll have just an idea and no trade, so liquidity is the answer here, and understanding the market microstructure you'll see why so often your SL is hit, so it's the smart money who are in search of liquidity that is hunting your SL.

It's very easy to read a novice trader behaviour, as they all act in the same way as how the books teach them, more often the majority of SLs will be below last swing low(or support) or above last swing high(or resistance). See Figure 1 for a classic order flow action which happened recently in EUR/USD and can explain recent price action.

  • Figure 1. Classic Example of Stop Hunt above resistance level.

It's time for you to stop blaming your Broker for your losses and take responsibility for your actions and focus on learning what to do in order for your SL not to be hit and timing better the market will help you avoid unnecessary losses.

How many times have you seen this type of action happening over and over again: Let's just take for example you go short GBP/USD at 1.5450 and you set your stop at 1.5500, just below recent resistance level or last swing low level, you set your TP at 1.5300, giving you a 1:3 ratio of risk to reward. But as soon you enter the market start moving against you breaks above the resistance level and hits your SL. Next thing the market reverse and start heading in the direction that you have predicted in the first place, and momentum start accelerating and soon you find that your TP could have been reached as you have predicted just that this time you're left with no position as you are already out.

  • Who is a Stop Hunter?
We can refer to a stop hunter of someone who has the ability to move the market like a bank or a hedge fund or some big player, and need liquidity to dump their position. Most of the time a stop hunter is a contrarian trader who is looking to liquidate his position into those stops. Remember that for every buyer must be a seller as long as the market are governed by the simple supply-demand equation the market are a zero sum game. Hypothetically speaking if lets say at one point in time if everyone wants to get out of their asset position for whatever reason and if the value of this asset drop to zero it translate that you're having a zero sum game.

Stop hunting works best when the majority of trader's positions are skewed in one side of the market, be it bearish or bullish. When you have market sentiment at extreme, the majority of trader will be placing their stops at obvious levels that a stop hunter is aware of. Now let's go into the psychology side of this stop hunting "game", in example above, short GBP/USD trade why would a trader would enter a short position at 1.5450 when you know there is higher demand at 1.5500. Next think a stop hunter is going to bid the price up in an effort to trigger those stops above 1.5500 psychological level, and now those shorts who put their stops there,now have to buy back their position, and their're buying back their position from the stop hunters who are selling at a nice profit by simply transferring the money from your account to their accounts. Now that the stops have been cleared the demand side of the market is lowered and the market can now move in the direction of line of least resistance and in the direction that you have predicted in the first place. Of course there is a second possibility where we have a stop cascade and the market don't reverse but continues to trigger those stops if the book is heavy enough thus accelerating the move as new traders join the ride.

  • Stop Hunt Example
Now lets go one step further and have a look at recent price action and see how even you can be a savvy stop hunter and be part of the world elite traders.

  • Figure 2. EUR/USD 1h chart, classic stop hunt.

  • Figure 3. GBP/CAD 1h chart, stop hunt below support level.

  • Figure 4. USD/CAD 1h chart, The market is clearing both side of the market. Trader who shorted the resistance are placing their stop just above, and the buyers who are going with the trend are also taken out.

  • [i]Figure 5. EUR/GBP 1h chart, Stop hunt below support level.
[/i]As you can see from the above example novice traders place their stops at predictable levels. The psychology side of trading is very important here and if you start thinking about other participants actions and the market sentiment you can build a powerful strategy by using the concept of stop hunting. Unfortunately I don't have enough space to cover the whole subject of stop hunting which is more vast, but if you have any question don't hesitate to address them.

Best Regards,
Daytrader21.
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