Forex Getting 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.
 
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Now now

lets relax a bit.
There is stop hunting but not to your individual account.

I will tell you that every broker knows where his loses and and wins are

Now for the nice guys who believe brokers are nice people who love you so much consider this scenario.

I have a business where the only way I will make money if I can sell something( a forex contract) higher than what I bought it at or lower than than what I sold at. The buyer or seller does not know or will never know what I really bought or sold it at.

The buyer or seller doesn't even have an idea who's buying what or even how much or even when. They both agree I'm telling the truth. The question is how will I make a profit as the broker? Is that a stupid question or what? Then they both pay you a commission for trading?

For anyone who has done basic computer programming, that is an open ended programming question and is easy.For those who haven't done programming , these guys hire programmers who answer that statistical problem for a living.You can't even afford 1k in your forex account, how can you compete?

The answer to stop hunting is easy in forex. If there is no central market, and the broker ,(whatever you call them, ecn,market maker, discount.....whatever you want) makes the prices, there will be a statistical computer program that makes them a profit. Now open oanda, fxcm, fxdd, easy forex etc. , the prices are not the same. Now if you believe there is no stop hunting after such an easy experiment you are either a naive trader or a broker rep.

Good luck but you should understand your forex broker is a thief.
 
To Doc

Doctor Leo said:
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...

Doc,

First off, congratulations if you're making "20+ pips 3-7 times a day." That adds up pretty quickly and you should be applauded for your consistency....bravo!!!

In your PS, I'm pretty sure you were referring to my earlier statement that "The retail trader has to put out the 10-50 pip stop losses." You went on to claim that statement was "nonsence."

The basis of my original statement was that retail traders for the most part don't have enough equity in their account to sustain 100+ stop losses and still maintain proper risk management per trade. I certainly don't agree with you that someone under $1000 should "better stay away from the market completely, go to a restaurant with your girlfriend instead." Obviously there's mini-accounts the retail client can use to learn on, test different stop limits, etc. That's the beauty of this market, anyone can basically participate...the degree of success everyone can have, well, that's a different story.

When you say "what prevents one from using 100 to 200 pip stops". Obviously, the amount of equity in one's account is one reason. Another reason, that you fail to mention, is because not everyone has to! If you're trading with a successful system, with good risk management, entry points, and profit/loss ratio, you don't have to use 100-200 pip stops...this goes for both institutional traders and retail traders. Now don't get me wrong, I realize that institutions do use such large stops because they essentially have an endless supply of money, but it's not "nonsense" to think that's the only way to be very successful.

Other than that, it was a pleasure reading your thoughts,

TT
 
I would dare to be abit 'perky' and say that institutional bank traders don't need to be as good as private (small) traders, because of their role.

Pls dont take this post as an insult, it's only my humble observation based on watching some of them
 
FxMarketSpace

The retail forex traders are always at a disadvantage position: Stop-hunting, slippage, erratic execution of trade... etc by the retail brokers to some extent, no doubt about that.
Maybe with the launching of the world first centrally-cleared forex trading platform by FxMarketSpace (www.fxmarketspace.com) on 26th March 2007, the outlook of the forex trading may be more promising. It currently deals with prime brokers. Can we anticipate that eventually it will come to the retail brokers? I hope it will...The retail forex market may evolve into a more standardized world, just like the Options and Futures market.
Let's follow up the development...
 
Now now

lets relax a bit.
There is stop hunting but not to your individual account.

I will tell you that every broker knows where his loses and and wins are

Now for the nice guys who believe brokers are nice people who love you so much consider this scenario.

I have a business where the only way I will make money if I can sell something( a forex contract) higher than what I bought it at or lower than than what I sold at. The buyer or seller does not know or will never know what I really bought or sold it at.

The buyer or seller doesn't even have an idea who's buying what or even how much or even when. They both agree I'm telling the truth. The question is how will I make a profit as the broker? Is that a stupid question or what? Then they both pay you a commission for trading?

For anyone who has done basic computer programming, that is an open ended programming question and is easy.For those who haven't done programming , these guys hire programmers who answer that statistical problem for a living.You can't even afford 1k in your forex account, how can you compete?

The answer to stop hunting is easy in forex. If there is no central market, and the broker ,(whatever you call them, ecn,market maker, discount.....whatever you want) makes the prices, there will be a statistical computer program that makes them a profit. Now open oanda, fxcm, fxdd, easy forex etc. , the prices are not the same. Now if you believe there is no stop hunting after such an easy experiment you are either a naive trader or a broker rep.

Good luck but you should understand your forex broker is a thief.
Everything you said concerns only dishonest brokers, or rather bucketshops whose direct profit is a client's loss. Any normal broker will make its living on the spread you pay them. Simply stop-hunting is too dangerous for broker itself. If you don't see why, I can explain it in more details. But generally speaking there's no stop-hunting for individual accounts anywhere.
Speaking of ECNs it's nonsense to discuss stop-hunting as you can see the order flow and price levels way before any price movement. There's another problem there - loss of liquidity at certain times, but this also has nothing in common with stop-hunting.
And reasons why stop-hunting doesn't take place in real market I had said before.
The phenomenon which you can see on your charts as stop-hunting is simply a large order or option execution in the closest proximity of the majority of other people's orders. Just because people inevitably tend to place orders at certain levels that everyone can see. If this fact is realised completely, you can easily develop a counter-majority trading strategy. And this is the reason why stop-hunting is a double-edged sword for a bucketshop.
 
Everything you said concerns only dishonest brokers, or rather bucketshops whose direct profit is a client's loss. Any normal broker will make its living on the spread you pay them. Simply stop-hunting is too dangerous for broker itself. If you don't see why, I can explain it in more details. But generally speaking there's no stop-hunting for individual accounts anywhere.
Speaking of ECNs it's nonsense to discuss stop-hunting as you can see the order flow and price levels way before any price movement. There's another problem there - loss of liquidity at certain times, but this also has nothing in common with stop-hunting.
And reasons why stop-hunting doesn't take place in real market I had said before.
The phenomenon which you can see on your charts as stop-hunting is simply a large order or option execution in the closest proximity of the majority of other people's orders. Just because people inevitably tend to place orders at certain levels that everyone can see. If this fact is realised completely, you can easily develop a counter-majority trading strategy. And this is the reason why stop-hunting is a double-edged sword for a bucketshop.

Just my thought:Stop-hunting may involve a huge sum of money ( millions-dollar trade made consecutively in a short period of time in order to move the price up or down a few pips), that a retail brokers may not opt to do due to the capital involved. What we see on a chart are the brief retracement or rebound in the course of price movement, just like what happens on stock price. This is a noise: the minute resultant of the imbalance in the executed buy and sell order by the major players.
I personally feel that the price movement in forex is more prone to market sentiment ( and emotion particularly whenever there is a news release ), whereas there is more element of 'manipulation' in the stock price by the big players.
A dishonest retail broker may instead opt to manipulate the trade against its clients internally: The chart is ( intentionally?) shown different from one broker to another; the stop-loss is triggered a few pips away against the price shown on the chart ( even it is not reached!). If this is called stop-hunting, then it is...in-house at the retail broker's level.
 
atomm,

you're absolutely right. And look, all "internal stop-hinting" always happens at some crucial levels which are obvious to see. Moreover, if a bucketshop dashes out stops on regular basis then it's very easy to play against this "broker" as you can know beforehand with, say, 80% confidence that at this level you can jump right in after a stop-blowing spike... That's what I meant when I said that stop-hunting is a double-edged sword for a dishonest broker.
 
I have wrote an article about stop hunting

Here it is The tip today will be on how to deal with stop losses and stop orders hunters. What I mean with hunters are brokers who hunt for your stop losses. I have received many emails from people who use to follow the up with my live trading orders and results, complaining that their brokers have triggered some orders on their platforms, but not on my platform. Although me and them had the same orders' numbers, yet the low or high of their broker differed or spiked by 2-3 pips more than me. In some cases it reached 10 pips.

Unfortunatly this is a very difficult situation to deal with. And it will surely cost you a lot of money. But here are the steps you should take to try to solve it:

1. First of all, if you feel that your broker is hunting for your stops, then you should open an account at another broker and start comparing your broker's lows and highs with this broker.

If you still feel that your broker is really hunting for your stops, email them and explain the situation and provide evidence (the other broker's lows and highs)

If your broker does denies this, or never tries to hear or solve this, then the only solution is to change your broker.

2. Another act you could do to make sure that your broker is honest, is to always add 2-3 pips to your orders. This method was found useful by some traders I advised to. For example, if you use hans123 and your order looks like this BUY GBP @192.10 SL 191.75 TP 193.30. Then make your order like this BUY GBP @ 192.13 SL 191.72 TP 193.33. This will surely save you from stop hunts, because it will be very wide for your broker to make such a spike, and the difference would be between his high and other brokers high would be wider and clearer. And this method would also save sometimes from false breakouts. However the drawback is that you pay more pips for this protection. However one the traders found a solution for this, by using one of my older tips, and when he closes the orders at 23:00 CET, he tries to save himslef 2-3 pips using my older tip,, and thus he is re-gaining what he paid before.

3. Putting mental stops. Which means, you actually place the stop loss in your mind. You do not put it on the platform. You say if GBP reached 191.75 I will stop it manually. This way, your broker would not know where the stop is, and would not try to hunt it.
 
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How long have you used the tips and dii you make profit ?

Thanks

I have been trading for a living since 2 years. The tips helps me much when trading systems. Even when th system had losing times, the tips turned them either into smaller losses or breakeven.
 
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