ForexGetting Started

Forex Stop Hunting – What is it?

You’ve probably seen it mentioned in various trading forums. It may have even happened to you a few times. It’s enough to make your head explode. What is it? It’s called Stop Hunting.

Here’s a typical trading situation. You’re convinced that the USD/JPY is heading up. You’ve entered a long position at 123.40 and you’ve set your stop at 123.05, slightly below an obvious double bottom. You set your initial target at 124.50, giving you more than a 3:1 ratio of reward to risk. Unfortunately, the trade begins to go against you and breaks down through the support. Your stop is hit and you’re out of the trade. You’re sure glad you had that stop in place! Who knows how far it could drop now that it’s broken that support, right?

Wrong. Guess what happens next. You got it…after taking out your stop, the price turns right back around and heads north, just as you originally thought it would. As you watch from the sidelines, the pair moves up past 124.00, then 125.00, and never looks back. Just maddening. You start to think, "If only I had set the stop just a little lower. What lousy luck!" But is this really just a case of bad luck?

Let me relate one of my own recent trading experiences. Based on a statistical trading tool that I use, I went short the AUD/USD at around 0.7530 and placed a stop up at 0.7570 which was above a local top. I was looking for the price to decline to below 0.7300 over the next few weeks. Within a day or so the price spiked up, took out my stop and then moved back down into the consolidation area at around 0.7540. Now, because of this last spike, there were two local highs on the chart near 0.7570. Not to be deterred from my trade, I re-entered my short position in the 0.7530 area, and this time I put my stop at 0.7580, just above the last spike. After all, what were the chances that the price would break through that resistance again? Well as it turned out, that’s exactly what happened! The price spiked up and hit my stop again, knocking me out of the trade for a second time. And even more frustrating, as soon as my stop was hit, the price turned right back down again in the direction I had originally anticipated!

Ian Fleming’s character, Goldfinger, once said,

"Once is happenstance, twice is coincidence, three times is enemy action." (Play James Bond music here…)

However, I wasn’t actually paranoid enough to think that someone was specifically picking off only my stop orders of course. First of all, my trades were so small that no one would bother trying to pick them off, and secondly I was doing these trades in a practice demo account! But I bet I wasn’t the only dunderhead that was putting my stops in that obvious position just above the recent highs. There were probably quite a few buy-stop orders in that price area, and it certainly looked to me like someone was gunning for those stops. This hypothetical someone may have been a stop hunter.

So what’s a stop hunter and what’s all this stuff about picking off stop orders? A stop hunter is a market player that attempts to trigger the stop orders of other traders for their own benefit. They generally have the capability to move the market by a small degree for a short period. The stop hunter may be a FOREX broker’s dealing desk which is trading in competition with its customers or it may simply be a large player in the market; a bank, a hedge fund or whatever.

Stop hunters operate best in an environment where most traders believe that the market is about to move in a certain direction. As traders take positions, the inexperienced ones (like me in the trade above) will place their stops at obvious places in order to cut losses if the price moves in the other direction. The stop hunters know where the amateurs are probably placing these stops, so they try to move the market enough to trigger them. This may allow a stop hunter to enter a trade at a good price before the market begins its move in the direction that everyone expects.

For example in my short trade above, there were a lot of indications that the market was headed down. Stop hunters knew that a lot of traders had taken short positions, and had probably positioned their buy-stops up at the 0.7570 area. So why should these savvy stop hunters enter a short position at 0.7530 when so many willing amateurs were willing to buy from them at 0.7570? So they proceeded to push the price up to 0.7570, and when my buy-stop order was triggered up there, guess who I was buying from? Exactly…the stop hunters who were selling to me at a great price (for them). Now I was out of the market, and they had taken over my short position at a price 40 pips above where I entered it. I had a 40 pip loss, while they entered at a price that was 40 pips better than they otherwise could have. Then, when the market headed down as we all expected it would, the stop hunters were laughing all the way to the bank while I was sitting on the sidelines pulling out what little hair I have left!

Note that a situation in which everyone expected the market to move up would work in just the opposite fashion. The amateurs would have their sell-stops at some obvious point below the market, and the stop hunters would push the market down in order to trigger those sell-stop orders. Then the amateurs would be selling out of their long positions in a panic while the stop hunters were buying from them at great prices in expectation of the coming move north.

The type of stop hunting that I’ve just described is used in situations where most market participants expect the price to move in a certain direction. In this situation, both the savvy stop hunters and the amateurs have the same market opinion; they are not battling each other in a contest of bulls vs. bears. The stop hunters are just trying to take over the positions of the amateurs at a good price.

There is another situation in which stop hunters try to move the market toward a group of stops in the hope that triggering the stops will push the market further in the same direction, thus triggering even more stops and so forth in a snowball effect. This is how some short term panics and rallies are created. In this case, the stop hunters have taken positions in the opposite direction from the amateurs, and are simply trying to trigger the stops to get the amateurs to panic and keep the ball rolling in that direction. My guess is that this tactic is more prevalent in less liquid markets like stocks and futures as opposed to FOREX.

 

Mirkopor

Newbie
I don't think there is stop hunting in forex. It happens much much mor ein stocks and futures. In forex i just think as there're an enourmous amount of traders, investors, exporters, etc etc... it leads to high volatility in the short term. Also economic news can impact the price for the short term.
Why there're false signals? Of course it they weren't everyone would gain in the market....but usually only few people gain and most lose. stop losses on resistance and supports are eaten just because many operators stop their trade at the same levels...
ciao
 

neil

Legendary member
cry from the audience............

Mirkopor said:
I don't think there is stop hunting in forex. It happens much much mor ein stocks and futures. In forex i just think as there're an enourmous amount of traders, investors, exporters, etc etc... it leads to high volatility in the short term. Also economic news can impact the price for the short term.
Why there're false signals? Of course it they weren't everyone would gain in the market....but usually only few people gain and most lose. stop losses on resistance and supports are eaten just because many operators stop their trade at the same levels...
ciao

Oh yes there is :p
 

garethb

Well-known member
"stop hunter is a market player that attempts to trigger the stop orders of other traders for their own benefit"

I wouldn't for one moment say that stop hunting doesn't take place in the forex market but for me it is the personification of "stop hunters" which makes me sceptical particularly in the forex market. Partly because of its size and partly because of its structure and the role of "brokers" within it.

I don't think you can go down that route of identifying market players and what actions they are taking to make money in forex without addressing the fundamental nature of the forex broker as used by most private traders outside the currency futures markets.

I think this article needs to provide rather more insight into the players involved and the origin of "market price" in that market before it is much help to anyone.
 

T Squared Trading

Active member
Why the retail trader is at a disadvantage...

Had to chime in here. The entire notion of "stop-hunting," is yet another reason why the retail traders is at a great disadvantage for the most part. The retail trader has to put out the 10-50 pip stop losses (which are likely to be affected by "stop-hunting, etc," whereas the inst. trader can throw out a 100-200 pip stop loss, because they can absorb that type of draw-down, and still maintain large position sizes.

T2
 

Harmonic

Newbie
Hunting In Forex

You are dead wrong.
Some Traders at UK bank I believe where hunting stops.
It was published in the press.
Very easy if you have billions at your disposal.
Big fish eats small fish

Mirkopor said:
I don't think there is stop hunting in forex. It happens much much mor ein stocks and futures. In forex i just think as there're an enourmous amount of traders, investors, exporters, etc etc... it leads to high volatility in the short term. Also economic news can impact the price for the short term.
Why there're false signals? Of course it they weren't everyone would gain in the market....but usually only few people gain and most lose. stop losses on resistance and supports are eaten just because many operators stop their trade at the same levels...
ciao
 

Crap Buddist

Senior member
Forex Stop Hunting - What is it?

I thought the author might of been experiencing those panicky 30 second moves blowing out orders, but this guy has days.


"Within a day or so the price spiked up, took out my stop and then moved back down into the consolidation area at around 0.7540."

Your kidding us? You had over 24 hours, what do you want a letter from the Queen, delivered by royal servants in horse drawn carriages , (very nice ones I might add) informing you the price was going higher?


"Some people have vacations that are not blessed with such time." ~ CB
 

Phil Mibbutz

Experienced member
Crap Buddist said:
Forex Stop Hunting - What is it?

...what do you want a letter from the Queen, delivered by royal servants in horse drawn carriages >>

Excellent idea correct, CB. Every forex trader has the right to expect at least a 48 hour warning if there's a chance of a stop order 20pips away being triggered. Horse-drawn carriages make far too much damn noise in the mews, though. A simple letter or telegram would be preferable, possibly followed up with a message by carrier pigeon in case a chap was out on the golf course in the morning.
 

noises49

Member
You went long UJ at 123.40 because the greater trend is up and fundamentals support it. A strategy to take advantage of "stop hunters" and normal market fluctuation is to "buy low and sell high."
X = normal lot size. Buy X at 123.40 and enter a buy limit order for 2X at 123.05. It's not reasonable to believe the market will shoot straight up as soon as we go long. Yes, it takes both guts and sufficient equity to trade like this, but most trading accounts are decimated by the dreaded stop hunters.
 

nickerson334

Active member

fun2trade

Junior member
The answer I think is yes and no. It depends on your account size. If you have a million dollar account, you better watch out, not only will they hunt your stops, they will do everythiing possible to make sure u lose, regardless whether you're trading with banks or FCMs. But if you have a small $5000 account, nobody really cares, they just let you bet against the numbers on your screen. If you 're trading with an FCM, you're not even trading in the maket, you're just trading against the numbers on your screen, much like a demo account, the only difference is, they honor your gains/losses on your real account.
 
fun2trade said:
The answer I think is yes and no. It depends on your account size. If you have a million dollar account, you better watch out, not only will they hunt your stops, they will do everythiing possible to make sure u lose, regardless whether you're trading with banks or FCMs. But if you have a small $5000 account, nobody really cares, they just let you bet against the numbers on your screen. If you 're trading with an FCM, you're not even trading in the maket, you're just trading against the numbers on your screen, much like a demo account, the only difference is, they honor your gains/losses on your real account.


Are you saying this?

If I have a system that is successful with a $10 000 account, My stops dont get hit, I use the exact same rules for each trade to decide where to place my stop and I make a profit on this account. All is good.

But your saying if my account is a $1000 000 and I use the exact same rules about placing stops as when the account was smaller I would now lose. Are you saying my stops would now get hit?

Is this right?
I cant see this happening just because of my account. Surely my account wont motivate the market to try and take my stop out.

Just want to know...
 

zagreb

Member
stop hunting is just another trading tactic, equally legitimate and not different from other tactics. Sometimes it is in line with our goal, sometimes it's against. I personally never have had problems with stop 'triggers'. If you can suppose (out of experience) when and what are stop-hunters trying to do, it is often easy to predict move (even join them to your own benefit).

Good time for stop hunt is around round numbers (as is 1.3000). If approaching/exhausting at 1.2980 on the up move, they will definitely try to touch resistance 1.3000 and reach 1.3005 to 1.3010 at least briefly
 
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ERA

Member
On a slightly different note because every broker quotes slightly different prices in FX I feel traders are lulled into placing their stops incorrectly at times. Slight discreancies in prices (particularly highs and lows) cause traders to draw trend lines incorrectly on their charts and place stops under or above these trend lines thinking they are safe when in actual fact if the prices were more accurate these stop would be further away .

An example would be if 'Trader A' drew a treadline of support between 2 major lows on his chart using his brokers prices. this showing a 'safe' point say 15 pips lower where he can place his stop. However if he drew the same trendline on say a raw interbank price feed his same stop may now only be a few pips away from the trendline or even above ( the greater the distance between the reference points used to construct the trendline the greater the possible variation).

It will always be in a brokers interest to have charts that produce slightly steeper trendlines between major highs and lows as clients will end up placing their stops closer to the real market than they think. I don't think this can be engineered however the small discrepancies that do occur will produce this.
 

T Squared Trading

Active member
Hey Guys,

I just wanted to chime in here again for the first time in a while. Very insightful comments, as usual. Most of you probably know this, but from an institutional level, there are many ways to combat "stop-hunting." Some of the ways is using multiple liquidity portals with different prime-brokers. For example placing a buy order with PB 1 and then selling half with PB2 and the other half with PB3, so on and so forth. Remember, while the liquidity is plentiful in Forex, trying to unload a few 100M of currency within a 5-10 pip range is sometimes awfully challenging.

Great posts,

T2
 
Good point Jammer.I am new to this site and I think it is better than most of the other ones out there. I have had the opportunity to work on the dealing desks of 2 of the larger brokers in the US, and to be honest, no one really cares enough about 99% of the clients to stop hunt etc. There is too much risk in trying to play games with individual accounts, and most of the larger shops have credit commities and risk commities that determine how much exposure a firm can have and a lot of the times, they require you to be hedged on 95% of orders. With this market there are far too many uneducated traders, as you all know, and people blame the brokers when there trades go wrong. Retail FX is a tough market for a retail client to trade, and until the small bucket shops get tossed out and the industry becomes more regulated, then there are going to be traders complaining left and right.



QUOTE=GammaJammer]Not impressed. Seemed to comprise approx 50% total guesswork and 50% pure sour grapes. Few people outside the wholesale fx market actually understand what goes on and this author, while doubtless well intentioned, smacks of an informed amateur rather than someone with some genuine insight to share.

Sorry

GJ[/QUOTE]
 

pssonice

Established member
this is a typical trading situation.

long at 123.40 stop at 123.05,
"Here's NOT a typical trading situation. "
slightly below an obvious double bottom.
You set your initial target at 124.50,
right?
"NO, THIS ISNT RIGHT"

the author isnt a daytrader
setting a stop below double bottom is .... I wont say it
why ? daytraders r expecting higher lows
lower lows r confirming a downtrend. I cud cry out loud.
100 pips target ????????? oh lord help me to resist !

this is a typical trading situation.
http://www.trade2win.com/boards/attachment.php?attachmentid=26696
stop settings outside the trending range. bollingerbands, whatever ulike
 
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Doctor Leo

Active member
Just wend my way through this thread and couldn't help getting astonished with the fact that one of the oldest and most notorious myths - so-called stop-hunting - still lives in minds of so many people.
Well, before speaking of the phenomena of the market let's first determine what market we're all trading, how it works, what are the participants and what influences the price. In fact, all these questions had been answered at these boards and at numerous sources across the web, but if there appear so many posts about "stop-hunting" and the authors are sure to believe in what they're saying, I guess it's worth repeating all this once again.
So... FX is NOT a regulated and NOT an exchange-traded market. This is obvious, and I hope everyone knows it, but surprisingly most people don't or cannot or do not want to think what follows this fact.
This fact simply allows for existence NUMEROUS prices for the same instrument at a time. There's NO single, recorded and proved price for ANY fx instrument at any moment. Under normal conditions prices from various sources agree even to a pip, but when, say, a strong news comes out, prices may differ up to 50 pips at different institutions. Just look into any professional datafeed such as Reuters' or Tenfore's and you'll see what I'm talking about.
This mere fact should already be enough by itself to close any conversation about "stop-hunting" on fx, but let's proceed.
Now, do you fully realize the real participants of this market and volumes traded there? Oh, I've seen good posts here about 10 major banks, but in fact anyone can be a real fx participant via a bank, the idea that banks by themselves are "hunting" or doing other stupid things is at least very naive. Let's consider an example. You're staying long JPY and have a stop at a reasonable level. Right, not only you but 99% of traders are staying long yen since the rollover is positive with this instrument. But at a particular moment a wholesales dealer should pay off to, say, Toyota, for export. What is he doing? Right, he's calling its bank and places an order to buy yen for dollars. What's happening then? Right, yen's rate sharply increases and you're off with your stop-loss, then, in just a few hours, when all the wholesales dealer orders are filled the price inevitably returns to its "normal" flow. Is there any "stop-hunting" in this case? No, if you knew the underlying facts and it seems yes if you're not informed.
So, the second myth to reveal is: banks mostly DO NOT TRADE fx by themselves, they're executing trades for their customers and there's NO way to see who belongs this particular order to.
Now, to come to us, small retail traders. Please rest assured that unless you're trading sizes over 10 mio you're completely INVISIBLE to real participants, and moreover you're NOT INTERESTING FOR THEM AT ALL. You (and me, and 90% of fx traders) are simply way too small to perform any influence to this market. So, the only person who can and sometimes really is hunting for your stops is your broker.
Here we should revise the first point of our investigations - as soon as there's NO single exchange for fx, and there's NO single price for any instrument at any given moment, your only source of price is your broker, and your only counter-party is your broker, and your King and your God is your broker, and you're just confined to either trade on its prices or look for any other. And there's no-one to blame and nowhere to complain, and this is right. That's it.
Now as to ECNs - it might turn a nice alternative to a broker if you know what you're doing and what you're trading. For instance, if you trade news, an ECN is definitely NOT suitable for you because simply of liquidity at certain price levels. Moreover if you go to real fx, you'll be surprised to learn that situation there is far worse.
So, what might we conclude from all the aforesaid? For a retail trader it seems to be the best option to find an honest broker with good trading conditions, and the most important criteria when choosing a broker should be the size of your orders: they should be as small for your counter-party as it won't simply feel your presence. At least personally I'm trading quite successfully with a "good ole" broker (scalping for 20+ pips 3 to 7 times a day).
Best of luck everybody,

Doc

PS And a statement that "a retial trader is enforced to use small stops like 10 or 20 pips" is nonsence. What prevents you from using 100 or 200 stop?? If you don't have enough money (say, under $1000) you'd better stay away from the market completely, go to a restaurant with your girlfriend instead. And if you're suffering from greed and trading with 400+:1 leverage, well, it's no-one but you to blame...
 
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