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Stop Hunts - Are they really what the name entails? Or is there more to them?
Traders love stop losses but hate stops. The market judges one according to ones claims. If you use a certain stop loss then you are making a claim about that trade. By that reasoning, there are no bad stop losses. But clearly, some stop outs seem worse then others.
The reason must be that we are trying to formulate an idea into a specific claim that does not satisfy the idea. I realized this when I would make predictions that to translate a generalized prediction into a falsifiable form, I might need to introduce some arbitrary aspects so that it could be tested. The problem is these specialized forms do not capture our when we think we should "win" a trade such as a bad stop out.
There is a solution which is to view trading a trade idea as a system itself and then to try to diversify or split the trade into multiple risk components. It can be seen as a monte carlo simulation of all possibilities.
For example, imagine we think the market will rally. We specify what claims should be satisfy our expectation:
1. If the market closes higher then the current price regardless of how much it goes against us.
2. If the market makes a significant new high before making a new low.
3. If the market moves immediately without much pullback to make a new high.
4. If the market makes only extend the current low buy a little but then makes a much higher high.
In this paradigm, you split your trade idea and the original risk, whatever the risk is, into multiple units of risk. So, you might trade a binary position, a futures position with a large target, and a futures position with a smaller target. The effect should be that you get closer to the average return of your generalized trade idea. You can also split the risk over time.
Another similar solution is to if you have say X unit risk for a trade idea to divide it into multiple allocations so that if you get stopped out then you can re-enter without going over your unit risk for the trade. This idea encapsulates the idea that there some stop outs might be bad and that you can statistically re-enter at a high probability in some cases.
The other way I view stop losses is that they are an expression of precision. Higher precision translates to higher return for risk but lower accuracy. Lower precision yields higher accuracy (win rate) but lower return per trade.
I am going to try and help. Your post suggests that, as a self professed beginner that u are suffering from misconceptions/mistakes that virtually all beginners have when they begin day trading. First, you need to focus on money management and stop loss strategy. first and foremost, Not taking big losses will keep u in the game till u learn how to trade. it sounds like you don't have a stop loss strategy, in that u said that the market dropped 4 pts and you got scared and got out of your trade. Also you stated that u were looking forward to getting a nice steak after you completed your trade. It is important to treat trading as a business and have no emotion once a trade is entered. (easier said than done you say?) How u can avoid emotion is to have a plan in place for entry and exit before u enter the trade, and NEVER, NEVER, ALTER YOUR PLAN DURING THE TRADE!!!. For most people , greed and fear overwhelm them during a trade and they cannot think rationally, hence STICK TO your plan! If you don't have a complete stop loss and money management plan, DON'T TRADE UNTIL YOU DO HAVE ONE. Also algo's are a fact of life in the ES (which is my main trading vehicle) and u need to think of a plan to deal with them. It sounds(from your post) that if a 4 pt move against your position "scared" you, you may need to reduce your trade size, so that u can withstand that type of move. Harmonics in the ES change regularly, and back when you took that trade u needed to be able to withstand a 4 point move against u in order to give your trade a chance to work imo. hope this helps!!! This is all stuff i had to learn when i started trading 5 years ago, Last, and others have commented on this already, do not make this personal. The market is not out to get you. Thinking this way will just get in the way of your ability to create a rational/profitable trading strategy.
We can't help but think in stories and narratives and that is exactly what is going on here. Grafting a fictional narrative onto a random process to try to make sense of it because that is what humans do.
People that think their stops are getting ran would really benefit from Yuval Noah Harari's book Sapiens.
Even beyond that though if we pick an instrument everyone here would put a stop at different prices. It is not even rational to believe there are spots that all these stops are sitting at to run.
You don't even have to get down to some of the absurdities of this argument like that a huge % of volume on a DERIVATIVE like index futures is hedging a portfolio of the underlie.
I've watch market makers do exactly that - run stops that are places where people are taught time and time again to place stops. No, everyone here wouldn't have a wildly different stop, because most people are taught to place them where? Just above the swing high and just below the swing low. It's that you're ignorant of how institutions and market makers trade that you say it's absurd.
If you think about it for a second, stops are easy to see on the DOM (or LOB, if you prefer). Just look for resting long orders if the market is going down, or short orders if the market is going up. Why else would people put buy orders above market, or sell orders below market? Only two reasons: (1) stops or (2) breakout orders. Say, the market goes down, and you see a bunch of sell orders getting executed as the price goes down, and a bunch of long resting orders appearing above price. What do you think those orders are?
So, what do the market makers do? They will reverse the market, fill those long orders, then dump the market back down. That does two things: (1) runs the stops of those people who are short, and (2) grabs the long orders for those breakout traders, then reverse the market, eventually taking out *their* stops, too. That's one way they gain liquidity, from retail traders. They don't do it every time, of course, that'd be too easy to figure out.
There are a number of institutional traders that have videos on YouTube showing exactly this sort of thing happening in realtime.
I have compiled all replies thus far to this thread and applied your ideas to my trading this week. Here are some things I've learned thanks to your efforts:
Someone stated that they find stop hunts are mostly at horizontal levels. I came to some realizations on this. A channel or diagonal trendline on a 5 minute chart may be completely irrelevant on an hourly chart, and vice versa. Horizontally however, major levels would remain the same. If I connect a swing low, with a higher low and create a diagonal trendline on a 5 minute chart, it is invisible to the hourly chart trader. To him, it's just noise within one single hourly candle. For the 5 minute chart trader, that trendline may be crucial. For him that trendline if broken, might signal a new short entry or prevent him from trading at all until he sees more action. Again, the hourly chart trader does not see or care about any of this. But one thing seems certain, BOTH traders may be watching the same horizontal price level of let's say the $2630s as a major level of support. A trader who trades off of daily or 4 hour charts too, may be watching $2630s. Infinite variations of wedges, flags, and channels across multiple time frames, but all eyes on the $2630s. Perhaps it is in this that "stop hunts", if they are real, make them "obvious" places of liquidity. We've all drawn perfectly parallel immaculate channels where tops and bottoms are perfectly aligned, and in each subjective time frame, they don't seem to get "hunted". They either just flat out break or are respected. Maybe it's because there are immeasurable swing lows and highs, all within different time frames that makes them impossible to hunt. I've decided to call it the Quantum Diagonal Line Theory. Put simply, I imagine a 5 minute chart trader calling up his friend, who trades the hourly chart, to say "had a great day, bought every dip riding that trendline". The hourly trader says "...where?" because to him, that all happened inside one or two candles and he has his own hourly channel he's been trading. But if the same 5 minute trader said "I got stopped out in that shakeout", the hourly chart trader might say "me too".
Another interesting study was Rrrracer's references to Wyckoff (thank you for your screen captures by the way, they are saved in my study folder). Is it correct to say that if Wyckoff was a trader today in this algo dominated landscape, his definition of a stop hunt would still remain "upthrusts" and "springs"? Wouldn't he say "yes that's what a spring or upthrust is..hello have you read my material or not?". Looking at these outliers as springs or upthrusts brings me a lot of comfort. It prevents me from demonizing those wicks as stop hunts. I will know very quickly if a supposed spring is in fact not a spring. This has also taught me to WAIT for springs or upthrusts instead of slapping that market order button as soon as I see a breakout.
Pa Dax and Leon of Pizza's targets based off of measured moves have given me a new way to look at entries and exits. I try to see where if others are long too, where might they want to take a profit? Where would they be exiting? Moving together with other traders instead of playing with myself. With this approach, if I am wrong, I quickly realize there was no one long with me and I was alone all along. Re-evaluate my entry and directional bias. This has taken so much anxiety away. It prevents greed AND fear, gives me a reasonable target, and most importantly, gives me a sensible stop. In the past, I might have taken an entry long, and for some reason decided I was gonna "let that winner run" to some completely irrational, nearly impossible target that turns into an impromptu swing trade. Now, instead of having a minor stroke and seeing hallucinations, I set a defined exit to a price target that has a high probability of being reached. It could go further but I won't be disappointed because the trade felt safe to me and did not scatter my emotions. Yesterday I had a great trade that hit my target and kept going but I was happy. I said thank you that's all I wanted anyway. Defining my entry and target within a range that others may be trading too means that now I am moving with the current and the other fish, not against it or being upside down lodged between a rock and a hard place.
GrantX and others have mentioned DOM trading and studying supply and demand. This is going to be my next endeavor. It just moves so fast sometimes and with sitting orders being pulled on a whim at any moment, I can't keep up. I think one day last week I physically started drooling while staring at the DOM and T&S window. Stacked resting orders are often misleading and block buys or sells don't seem to give me any kind of direction. I listen to the audiobook of Livermore's Reminiscence every single day and I know he was a tape reader. I just don't know how it tells me anything. Sure if the tape is printing quickly with tons of buys, it moves up, but I can't remember all those prices to know that when it starts going down, it is a reversal and not a pullback. Isn't tape reading all about knowing where there are a lot of buyers or sellers? Or is that profile? Or maybe that's delta. Or maybe I'm having a stroke. I might see a block buy of 150 contracts but I wonder to myself..what if he only wanted a few ticks? What if they have absolutely no intention of seeing this through for more than a few ticks? It doesn't give me the confidence to believe in the strength of a continued move. I'll keep at it though and update. I've had some great, illuminating trades this week and hope all of you did too. I was there with you, in ES, using what you've taught me. I was that 1 lot you saw flash by
"Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think. It is wise to enjoy that which is possible without hoping for the continuance of a favorable conjuncture and the persistence of good luck" - Joseph de la Vega in 'Confusion of Confusions' (1688)
This post is very heartening... not that you have found "the answer," but that you have taken things that make sense to you and they are helping you to get a handle on what you're seeing and how to trade it.
I was concerned that this flood of advice you were getting, much of it flatly contradicting other advice, would just be a confusing mishmash, but I see I was wrong, and I'm happy to be so.
There are a lot of things that work, but there are more things that don't. It looks like you're moving ahead now in finding some things that do work, for you.
Good luck. I wish you more progress and more success. Everyone is doing much the same thing, feeling our way along, sometimes with some help from our friends.
Very good @JMoniker. You've had a lot of people chime in here with their ideas on what is happening, it's nice to see you interpreting it in your own fashion, what makes sense to you.
Totally agree with your assessment of horizontal vs diagonal S/R; trend lines are what they are, a lot of people trade off them but it can be a tough gig because of the reasons you mention. They're just another way of curve fitting price. Horizontal areas, OTOH, are the real deal.
LOL thanks, I'm humbled that you found them useful. I started early on with some Wyckoff but came to realize that springs and upthrusts are motivated stabs at liquidity, to grab enough fuel to push price in the other direction. The fuel is in the form of new orders and stops; stops are simply collateral damage, but it's pretty easy to see where they would exist on a chart. Trading from the edges is one of the safest ways to play this game; you can get into them with a really tight stop and know whether you're right or wrong quickly, they are very low risk plays.
Look over your charts, I wouldn't be surprised if you started seeing them all over the place, and on all timeframes. The larger timeframe grabs obviously imply a much bigger move. Start to apply some market structure and context and you'll be better able to tell if it's likely to be a spring/upthrust reversal or a continuation move.
Oh yeah, put a '@' in front of the user names you're mentioning to tag them. Best of luck, trade well buddy!
The swing high and low of what time frame? Who is doing all this teaching? If you know where your stop is going to be ran why would you put your stop there?
How do you separate the algorithmic cash index arbitrage from the market maker?
