Stop hunting and stop losses

Question

Hi Anna,Thank you very much for the wonderful insights you provided in a your books. I’ve purchased 3 of them (2 on Forex and 1 on VPA). My favorite is the one on VPA which truly opened my eyes to the different stages of a trend and understanding the relationship between price and volume. I’ve used candlesticks for about 8 years and must say that combining candlesticks with volume is a powerful combination indeed! Thank you :)I do have a question in regards to placing stop loss orders in the Forex Market. If the market is as shady as you’ve indicated, why would anyone want to place a stop loss order which the market makers will see and take advantage of you and/or your position? It seems that one will be opening themselves up to an uneven playing field.

Answer

Hi – Many thanks for your email and for purchasing my books. It is very much appreciated, as are your very kind and generous comments. I am always delighted to hear from fellow traders as this allows me to address their questions and comments in my live webinars and seminars. With regard to the placing of stop orders, you are correct they are visible not least to both the market makers and your broker. However, a stop loss (in my opinion) is mandatory for several reasons, not least of course because it protects your most valuable asset – namely your trading capital. If you lose your capital then you are out of the game, and the maths of attempting to recover from a loss is always working against you. Let me give you an example : If you lose 10% of your trading capital, then you have to recover 11.1% to return to your starting point. If you lose 25% you will need to recover 33% and if you lose 50% of your trading capital then to return to par you need a 100% return. At this point you are simply gambling, in other words, it’s double or quits which is why a stop loss is one of the most important rules of trading.

With regard to what is often referred to as ‘stop loss hunting’ this is a tactic employed by both market makers and certain brokers. As far as the market makers are concerned there is little we can do as retail traders and you will see this type of behaviour reflected at every major news release. The NFP is a classic example where the market will jump initially one way on the release, only to reverse very quickly minutes later once the stop hunting exercise has been completed and traders taken out of the market. It is a very cynical practice but a trading fact of life which is why news trading should be approached with great caution. Moving to the brokers, whilst this practice was commonplace in the days when most brokers were dealer brokers and simply traded against their clients. In today’s market retail traders can now opt to use ECN or STP type brokers where every order is passed electronically to the interbank pool. This, at least, avoids one element of stop hunting. The most transparent brokers are those who charge a small commission as there is no such thing as a ‘free lunch’ where the cost of trading is built into the spread. Finally, to consider to stop loss placement this is something I explain extensively in my forex training rooms but in simple terms it is the congestion phases which offer the safest and most logical place for any stop loss. The reason for this is simple as it is market that is telling us where it has found resistance or support, and once a market moves away from these regions then any stop loss (above or below) is protected by this natural barrier created by the market. Of course, any stop loss and subsequent management should always fulfill your risk and money management rules. One final point always remember to avoid placing any stops at 5s and zeros. Hope the above helps and thank you again for taking the time and trouble to write to me. Kind regards and wishing you every success with your own trading.

About Anna 1030 Articles
Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

2 Comments on Stop hunting and stop losses

  1. Anna I have just read Volume Price analysis and reviewed on Amazon …it was a real insight into trading thank you for sharing your experiences .
    I have been trading for approx 3 years not high stakes and at a pace that would suit my time available I have studied numerous books and feel like I’ve done a small degree ……. with nothing to show …my problem is something which you talked about in your book and that is I jump straight into a trade with disregard for everything I have learned for the second time now in a few months I’ve blown my monthly trading capital it’s starting to add up too.
    I’am now probably going into the red for this year ………I don’t want to give up but it feels like I’m gambling some
    thing I don’t normally do… how did you overcome the temptation to jump straight in.

    Please do not print name or contact.

    Thank you.

    • Hi – and many thanks for your kind comments and delighted that you have enjoyed reading the Volume Price Analysis book and apologies for the delay in replying. If it is any consolation you are not alone and this is a painful journey many traders make before discovering that volume and price provide a sound methodology on which to base their trading decisions. It is the foundation stone of trading, and it can be applied to any market in any timeframe, and perhaps the most important aspect it will help you with is your market timing: timing when to get in and timing when to get out. After all, if you believe that all markets are manipulated by the insiders and market makers, then the essence of volume of price analysis is to buy when they are buying, sell when they are selling, and stay out when they are playing tricks in the market. VPA then provides the prism through which their activity can be viewed – they cannot hide volume, and volume is activity. Naturally I wish you every success and I hope is studying and learning more based on volume and price, this alone will help you to improve your timing and to stop you buying when the insiders are selling, and vice versa. All best wishes and thanks again – Anna

Leave a Reply

Your email address will not be published.


*


» CONTACT ME