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Stop Hunting - Fact or Fiction?
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Stop Hunting - Fact or Fiction?

  #11 (permalink)
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stop hunting

yes there is stop hunting but if you are new to trading they also take the other side of your trade. why would they not do that, 98% fail. if your trading the ES with a 4 to 8 tick stop , it will get hunted more so if it is 4 to 5 points. the only thing worse than no stop is a tight stop. the ES for example has about a 16 point range. 25 to 35 % of the ATR is 4 to 5 points. not 4 to 8 ticks. hope it helps

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  #12 (permalink)
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I think that the term "stop hunting" is over-used by the trading community. People want to personalize the market and blame somebody for bad trades, so "market makers" that "picked off my stop" are at the top of the list. In reality, no one cares about a single small retail trader's order. They really don't.

That doesn't mean that there isn't "stop hunting" per se, it's just done more on an aggregate level, on a limited basis. What some algos do is try to push price to possible clusters of stops at obvious points, such as just above a recent high or just below a recent low. However, it takes a LOT of firepower and there is still a risk of getting run over.

On the FX side, I don't believe that the brokers try to run stops, but that doesn't mean they are completely innocent. What they do is play with the spread to protect themselves from volatility. You can see it when news hits - EURUSD will jump from 1 pip wide to 10-20 pips in an instant. However, OANDA or GAIN Capital have no interest at directly trying to manipulate a small order. In fact, they instantly lay off your order to another trader or institution a millisecond after filling yours. They always want to be "flat" at any given point in time. They are like bookmakers - they just want the spread, and have no opinion as to the market direction.

Of course, there are scammy "forex brokers" who will just steal your money. Why go through the trouble of writing a complex market manipulation algo when they can just fill a briefcase with your cash and run off to Thailand?

Just remember, the "market" doesn't care about you, or your little order. The market isn't a person - it is the aggregation of hundreds of different humans and computers acting at the same time, who all have different time horizons and objectives. Yes, there are numerous traps out there (i.e. recent highs and lows), but worry more about your system than some conspiracy theory.

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  #13 (permalink)
Seth
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Ok, let me try to be a little more specific about a stop hunting scenario.

The market has reached a point of balance where we trade in a 2-4 tick range. Institutional traders will watch to see which way the market wants to break out of that range. If enough people pile on to that trade they'll pull their liquidity going the opposite direction, and hit whatever else was at that level that they didn't own all at once. If it doesn't start going by itself they can help it along more. Some traders call this "the lure".

And I only say it happens because the one time I had an opportunity to see an institutional trader trade, that's exactly what they did. She knew what the market's position was from cumulative delta, and intentionally created a stop run to demonstrate the macro ability of their DOM to me (when you hold the macro key, actions queue up and don't execute until you let go of the key).

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  #14 (permalink)
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I think that's a great example of what I would call "rational stop running." If you're trading in the 1-2 point range, it's the wild west. All sorts of algo wars and DOM readers battling it out. Stop runs are but one technique. Pulling bids and sweeping the book are others.

With all that said, I don't think that there is some "evil cabal" of "big money" that rigs the markets, like a lot of people believe - ESPECIALLY when you get away from noise trading for ticks. Yes, there are unscrupulous FX brokers who will re-quote you and push the spread away from you in a fast market (or simply steal your money), but trading on a) a regulated central exchange like the CME; or b) trading with a reputable FX broker (like OANDA or IB); and c) trading out of the noise, your biggest problem will be your system, not someone ripping you off.

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  #15 (permalink)
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TWDsje View Post
Ok, let me try to be a little more specific about a stop hunting scenario.

The market has reached a point of balance where we trade in a 2-4 tick range. Institutional traders will watch to see which way the market wants to break out of that range. If enough people pile on to that trade they'll pull their liquidity going the opposite direction, and hit whatever else was at that level that they didn't own all at once. If it doesn't start going by itself they can help it along more. Some traders call this "the lure".

And I only say it happens because the one time I had an opportunity to see an institutional trader trade, that's exactly what they did. She knew what the market's position was from cumulative delta, and intentionally created a stop run to demonstrate the macro ability of their DOM to me (when you hold the macro key, actions queue up and don't execute until you let go of the key).

So the institutional players are watching each other, waiting for one (or more) of them to tip the scale and then jump in. And with the algorithmic trading program helping to hide their intentions that they can unleash or inhibit with the press of a macro key, they get in and out of the market. Very interesting.

Do they look at anything else besides price and cumulative delta?

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  #16 (permalink)
Seth
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The institutional trading that I was briefly exposed to gave traders all of the same indicators that retail traders will use. Things like VWAP, volume profile, etc. However, there's two pieces of information they have access to that retail traders don't get. The first is the institutional order flow. So they know when clients of theirs are making big orders, and can adjust their trading accordingly. The second is more complicated pricing setups. Basically they can see how an asset's price change will affect the price of other assets, and the overall cost of doing business. My sense was this just allows them to make better risk reward decisions. In terms of whether the next move is up or down they're using the same order flow everyone else is.

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  #17 (permalink)
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jflaggs View Post
Hello,

*Please Note: I am looking for opinions from experienced traders, not noobs (like me) who may or may not be sore about how their broker is out to get them. I want an objective discussion if possible. Thanks.*

I hear a lot of accusations of Market Makers "stop hunting", trading against clients, and generally not respecting limit order prices. However, I have never understood HOW exactly Market Makers can accomplish price manipulation for their own gain.

Is there a person sitting behind a desk with a bid/ask knob that is creating the price movement in their favor or deliberately moving the bid/ask to take out your stops? If this is the case, then that would imply that different Market Makers will be giving completely separate quotes for the same instrument. If I pull up 5 minute charts from, say, Gain Capital and TradeStation, could I expect to see two completely different charts as each Market Maker cranks their bid/ask knob in their best interest?

I know that the example is silly, but the question is very serious. I need to know if stop hunting is a tin foil hat theory developed by losing traders or if I should seriously consider going with an ECN; and is an ECN the solution to this problem? If stop hunting and such are very true, is there any way a trader can avoid it? I don't want to play the victim role without fully understanding what's going on here.

Your input is appreciated

Thanks


I find this topic interesting and I think there is a problem in the "stop run" theory, which has to do with how markets operate. All markets are mathematically based. In order for any price level to be reached there has to be (atleast) one institution willing to buy, and (atleast) one institution willing to sell. Otherwise the price will not be reached.

What you are referring to as a "stop run" is in my opinion more likely a vacuum, or a miss read of the current market cycle and improper stop placement. A vacuum exists when bulls or bears step aside and wait for a price level to be reached, which sucks the market to the price level. For example if a bear can soon sell a few ticks higher above a swing high, why wouldn't they wait for the price to be reached?

When prices are in a trading range this is often where weak traders place stops (also known as a "skunk stop"). This is often beyond a swing point, which is likely to be tested. In a trading range, most breakouts fail and a swing stop is not appropriate because this is where institutions initiate trades, take profits, or scale in. A swing stop is only appropriate when there is a clear always in position and the market is in a trend.

I can understand the frustration and why a new trader might think the market is out to get them, but this is simply not the case. The markets do not care about you and are a reflection of institutional (and human) behavior.

However, stop placement is an important concept to understand, but largely depends on the style of trader you are (scalper, swing trader, or always in trader). For this reason i think it is best to first understand institutional behavior and the market cycle, before attempting to decipher proper stop placement.

Here is a good video example of the market cycle and how institutions initiate / manage trades. I have also discussed and shown examples of vacuums in videos but dont have time to find which ones.

https://www.youtube.com/watch?v=EVdqcXZ8Azc

Hope this helps,
Josh

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  #18 (permalink)
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mastercraft29 View Post
I find this topic interesting and I think there is a problem in the "stop run" theory, which has to do with how markets operate. All markets are mathematically based. In order for any price level to be reached there has to be (atleast) one institution willing to buy, and (atleast) one institution willing to sell. Otherwise the price will not be reached.

What you are referring to as a "stop run" is in my opinion more likely a vacuum, or a miss read of the current market cycle and improper stop placement. A vacuum exists when bulls or bears step aside and wait for a price level to be reached, which sucks the market to the price level. For example if a bear can soon sell a few ticks higher above a swing high, why wouldn't they wait for the price to be reached?

When prices are in a trading range this is often where weak traders place stops (also known as a "skunk stop"). This is often beyond a swing point, which is likely to be tested. In a trading range, most breakouts fail and a swing stop is not appropriate because this is where institutions initiate trades, take profits, or scale in. A swing stop is only appropriate when there is a clear always in position and the market is in a trend.

I can understand the frustration and why a new trader might think the market is out to get them, but this is simply not the case. The markets do not care about you and are a reflection of institutional (and human) behavior.

However, stop placement is an important concept to understand, but largely depends on the style of trader you are (scalper, swing trader, or always in trader). For this reason i think it is best to first understand institutional behavior and the market cycle, before attempting to decipher proper stop placement.

Here is a good video example of the market cycle and how institutions initiate / manage trades. I have also discussed and shown examples of vacuums in videos but dont have time to find which ones.

https://www.youtube.com/watch?v=EVdqcXZ8Azc

Hope this helps,
Josh

I fundamentally disagree with your explanation.

A stop run is one or more (colusion) institutions pushing the price to a certain level
by swiping the book (yes the resting orders are executed, because the stops that
are sitting behind those resting orders are way more lucrative....

That is also why you see sometimes somebody 'pooking', that institution tries to
see if it's possible to move the price, if an iceberg is sitting there, that institution
may not have enough power...

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  #19 (permalink)
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rleplae View Post
I fundamentally disagree with your explanation.

A stop run is one or more (colusion) institutions pushing the price to a certain level
by swiping the book (yes the resting orders are executed, because the stops that
are sitting behind those resting orders are way more lucrative....

That is also why you see sometimes somebody 'pooking', that institution tries to
see if it's possible to move the price, if an iceberg is sitting there, that institution
may not have enough power...


That is fine, you do not have to agree with me.

However there is a problem with your theory. If it were correct, and the institutions were "running stops" and there are stop orders at any given price level, prices would breakout strongly beyond the stop entry for atleast scalpers profit. But since prices instead reverse into the opposite direction, this means there were more limit order entrants (or profit taking) at the price level than institutions entering or exiting on stops.

How do i know this? Because if institutions were exiting or entering on a stop above a swing high for example, prices would rally strongly above the swing point. But when they do not (like in a TR), this means there were more institutions intitating or taking profits with limit orders at the price level. Therefore the stop run theory is not correct. The same can be said about individual bars. If institutions were selling below a bar on a stop, prices would sell off. When they do not and instead continue to rally, the institutions are buying below bars with limit orders (or one side is dominant).

Institutions can collude with one another sure, but you must also understand that there are an equal number of institutions "colluding" on the opposite side of the trade. Every trade and price has a mathematical basis behind it, with institutions on both sides. Therefore "noise" does not exist, and everything happens for a reason once you understand institutional behavior.

I also do not know what you mean by "pooking". But again, there is a flaw with this. And that is the fact there has to be more than one institution willing to buy at a price level to move the price. If an institution "may not" have enough power to move the market, it would not make mathematical sense for them to initiate the trade.

I think what you are referring to are high frequency trading firms, who will scalp for a single tick. But again, this goes back to the point i am making about the vacuum effect where one side steps aside and the HFT firms are then able to push the price to the level where the other side appears as if out of no where and the HFT firms take profits. So in this sense (if this is what you mean), then yes you are correct about them being able to move the market (due to the opposite side waiting, and causing a vacuum).

Hopefully you do not take this as me challenging you personally. Just providing an opposing view. Either way, makes for good conversation!

Josh

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  #20 (permalink)
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Ironically, soon after my last post there was a great example of my point in the EURUSD.

See image. Some traders might call these two arrows "stop runs". If this is the case, why did prices not breakout strongly below the low or above the high? Because this is a trading range, where institutions buy low sell high, scalp, use a wide stop and scale in when prices do not immediately go in their favor.

In example 1, prices broke out below the previous low but immediately reversed up. Some might think this is a stop run. But there is a problem. The bulls had already taken profits at the new high (small sideways TR, micro wedge and FF reversal). Most bulls were not willing to buy high in the trading range, and those who did used a wide stop like a measured move down and scaled in at the new low. This breif time of a one sided market led to a sell vacuum as the bulls stepped aside. Once at a new low, bulls who were flat bought the new low and bears bought to take profits, which led to the large tail and new high.

In example 2, bears had taken profits on 1 or used a wide stop and scaled in at the new high. Bulls who had bought 1, took profits at the new high, resulting in another failed breakout and reversal.
So my point is this; these are not stop runs because they already took profits.

If there were more stops at this location, prices would sell off strongly below the new low, or breakout strongly above the new high. If you are placing your stops in these locations, your stop location is the problem. Not the market "out to get you", or "running your stops"

Josh

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