In this video, we’re going to reveal the secret behind who’s really hunting your stop losses. We’ll also show you one trick that will protect you from ever being a victim of stop hunting again.
Now, if you’ve ever entered a trade only to see your stop loss get hit right before the price races off in your direction, you’ll know how frustrating that feels, and many retail traders believe that that must be their broker, because after all, the broker is the one handling the trades, and they can see where all the orders are placed, but there are two reasons that that’s unlikely to be the case.
Firstly, in a perfect world, a broker makes more money from consistently profitable clients. Right? So it’s in their interest to actually try and help their clients make money over the long run, because what this will mean is, that they generate commissions from that client for life, and as the client makes more money, the value of the commissions increase.
Secondly, even in the imperfect world we actually live in, most top-level brokers are regulated. Right? So, what this means is, that if a broker does do something, like on your stops, it won’t be long before they’re punished by the regulator, and ultimately forced out of business.
So even for that reason alone, it’s just too much of a reputational risk, but it doesn’t mean it’s not happening. In fact, it’s other larger traders that are hunting your stops, and here’s how it works.
Now, imagine that you are really large FX trader, and you want to get in on the big rally that you think is going to happen on a currency pair. The problem is, you are trading such a large size, that if you just try and enter the market at current price, you’re going to get some bad slippage, right, because no one’s going to take the other side of the entire position in one go. It’s just too risky.
So, to combat this, the large trader will try and find other types of liquidity that they can use to fill that order in one go, while ensuring they get a good price. And one of the prime sources of liquidity are the orders or the traders in the market.
Now, imagine in that same scenario, there are also a bunch of retail traders also going along. So what do they do? So, they enter the market, and then they place their stop losses behind a recent swing point on the chart.
The logic is, if the price couldn’t breach that level before, then it definitely won’t breach it again before the big move plays out, and if it does get breached, then the trade idea is probably wrong anyway.
So, you end up with a situation where all the retail stops are pretty much in the same place. So if everyone is buying, that means the stop losses are all sell orders, and this is exactly what the larger traders are looking for in order to execute their own long positions.
So because the large traders have enough capital to move currency prices over very short distances, they sometimes decide to force the price lower until it hits all the stop loss orders, at which point the trade has got the liquidity they need to execute their real trade, which is the buy.
The stop loss orders are congregated in one place, so they absorb the big order in one place. At this point, the large traders are now in the market, and the price rallies off in the direction everyone was anticipating, and all the retail traders are left with losses. The large trader rides the move for a profit.
Now, this practice is more common than you think, and it’s kind of related to the concept of short squeezing that the stock traders encounter. Now, to avoid being cannon fodder for larger traders, you should think very carefully about where you place your stops.
So instead of using the most recent swing point, you just move your stop a little bit further away, because by deliberately putting your stop losses away from everyone else’s, you’re just going to be far less likely to be a victim of stop haunting. A single small order is not what those large traders are looking for.
Now, just before we go, it’s important to mention that there are unscrupulous brokers out there. Right? And this is a totally different thing, and you’ll get done by your broker, if you’re using a broker who is not regulated in a credible jurisdiction.
So, if you are doing that, we definitely suggest moving to a regulated broker in a credible jurisdiction. I’d love to know, what’s the biggest question you have about how the Forex markets work? Write it in the comments below, and we’ll make a video answering your questions.