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Brokers Hunting Stop Losses – Fact Or Fiction?
Yes, stop hunting is a real thing, but not in the way that most retail traders have been taught.
So the idea is that you take a trade at this level and you open up your stop. Let’s say we place your stop right over there. And then suddenly, what you see happen is the market inches down, touches that specific level where you are, and then suddenly you see it reverse in the direction of your trade. So, is it real? Yes, it does happen.
RECOMMENDED READING: STOP LOSSES
Why does it happen and who is responsible for it? Most retail traders believe that this is something that’s being done by the brokers to take them out of the trade, but in reality it’s not really done by brokers at all. You see the investment industry is saturated with brokers.
Brokers are always competing against each other for customers and the reason for the desperate need for more customers and more market share is because their business models only work with numbers.
They make money when traders trade and continue trading with them because they make money on the spread and they make money on the commissions. Now, if they fraudulently stole all their clients money by continuously doing stop hunting, pretty soon there won’t be any clients left to trade with them.
So, it’s in their best interest to keep you profitable as long as possible. Assuming your broker is regulated and reputable, right? I’m assuming you would have already done your due diligence on your broker before trusting your money with them.
So assuming that they are regulated and reputable, why would those type of companies, you know, risk that type of fraudulent activity and taking them out of business? It doesn’t make sense for my business point of view, right?
So, if it’s not your broker, where does stop hunting come from?
Now, in reality, it’s actually the largest speculators or larger traders out there, the big boys, and that are the main culprits for hunting stops. But before you get angry at them, you need to understand why exactly they do it. Remember, when you lose money in a particular trade, the large speculator doesn’t make the money that you lost, right?
It’s the liquidity provider that makes the money because the liquidity provider provided liquidity against your trade. So, when you lose, it’s the liquidity provider making money and it’s not the big player that hunting stops. Now, the reason why they do it the reason why big traders hunt stops, is basically because it It’s actually better phrased as liquidity hunting and not really stop hunting.
So, it comes down to liquidity. When your trade is very large, let’s say you are a big trader, a large speculator and you want to place a trade worth 100 million dollars. And, if you want to enter that market, there is a real risk of basically getting fold at a very bad price, because those type of orders aren’t just folding immediately. You know, there needs to be enough liquidity, counter orders in the market for that trade to be fold.
So if the larger players look at order pools in the system, and yes, they can see where majority of orders are sitting, if they look at particular order pools in the system. So let’s go back to the chart and let’s say they see there’s a whole pool of orders sitting right at this level.
So what they would do is they would push down the price into this overall area, obviously that’s gonna trip a lot of stops, but there’s a liquidity pool of orders sitting at that level. Now what they can do is once they reach that level, there’s a enough counter orders, enough liquidity in the market for them to basically execute that massive trade. And that is why once it reaches that level, that big order gets fold, and the market starts rallying in the direction of the original trade.
So if the larger player looks at that order pool, they basically just push the price into that particular level, find liquidity and once they have the liquidity, they open up the trade they actually want to take.
Now that’s why we usually prefer not placing our stops at the most obvious closest, place on the charts. Because that is where majority of traders would probably have already placed their stops. And that makes those levels prime for possible stop hunting, which is why it’s always better to place it a little bit out of the most obvious area and for an entry because that really increases the probability of not falling prey to liquidity hunting in the system.