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Stop-hunting is NOT the problem some people say

A topic that comes up a lot on forex discussion forums is “stop hunting”, though it isn’t something restricted just to the currency market. Before I get in to my thoughts on the subject, let me try to give you a definition.

Stop hunting is a practice by traders and/or market makers whereby they move prices intentionally to hit a specific level in order to trigger the stop orders they know are piled up there. The reason for doing so is to be able to take the other side of those trades and profit by the short-term move the flurry of activity creates.

The practice of stop-hunting really started with floor traders, especially in the futures market. The market makers could see the order flow coming in from the brokers (acting on behalf of their customers), so they knew where a lot of standing stop orders were located. If prices were close to one of those levels, a little bit of concerted buying or selling could move prices enough to trigger those stops.

Obviously, this sort of activity gave the floor traders a bad name, at least to those not working on the floor. The fact of the matter, though, is that any trader – on or off the floor – with sufficient clout to move a market could stop hunt if they were nimble enough to be able to get in and out.

With the markets becoming more and more electronic, you might think that stop hunting would become a thing of the past. Unfortunately, that isn’t the case.

The focus of stop hunting suspicion these days has shifted to the retail forex market. The fact that many of the brokers involved are in fact market makers unto themselves gives them the opportunity to influence prices directly. That provides the opportunity for the unscrupulous to alter a quote just enough to trigger a collection of orders – of which they have ready access to records – and thereby generate profits from that order flow.

Now, if you spend any time at all reading posting on forex forum sites, you would quickly get the impression that stop hunting is a regular practice. I’m here to say that it isn’t nearly the problem some would make it out to be. I’d be willing to bet that the vast majority of folks who blame stop hunting for their losses in the markets are simply using that as a convenient way to place the blame for losing trades on someone other than themselves (consciously or unconsciously).

Let’s think about it. Does it really benefit a broker to do this? Maybe in the very short-term, but certainly not in the long run. A broker who gains a reputation for stop hunting will quickly lose its customer base, and could potentially find itself in legal trouble. Not worth it.

So the next time you read someone complaining about stop hunting or making it sound like it’s commonplace in the markets, take it with a huge grain of salt. More than likely they put their stop too tight to the market price. And if you’re not a scalper or some other kind of short-term trader, this shouldn’t even be an issue. If you are a swing or position trader whose trade got close enough to its stop for stop hunting have taken place, more than likely the trade wasn’t all that great in the first place.

By John

Author of The Essentials of Trading

3 replies on “Stop-hunting is NOT the problem some people say”

Yeah it’s interesting how many posts on MoneyTec and the like talk about stop hunting. If you have a trading method that has a positive expectancy then stop hunting shouldn’t be an issue. Yes, there are some crooked Forex brokers out there, but that isn’t the majority.

This notion of stop hunting myth are perpetuated by failures as you rightly say who never blame themselves. Even using their own erroneous reasoning, assuming that stop hunting is a regular practice that can even be pulled off in our mass participant, mass volume arena, they can avoid it by placing non-mainstream SL rather than using what brokers, market makers, and other savvy professional traders know how other amateur newbies are trading. How newbies trade is quite obvious and it is also obvious where they would place the stop losses. They can easily defeat this even assuming that their retard logic is true by not setting SL and using a mental one. Of course there are crooked brokers out there but in our huge market now, only way they can do anything to you is if they are indeed feeding totally false signal to their platform and risk being in big trouble. If the reputable firm is in Canada, UK, or USA, none of them would risk such a thing when in fact they are all market makers and they do quite well no matter how much you do well or how much you suck. Now, some newbies who believe in such nonsense are also likely to go with a dubious firms newly opened up in Cyprus or Panama that promises incredible leverage and promises no stop hunting and they of course eat it up when in fact, those are the types that could very well most likely be the crooked firms. Unless someone trades huge volumes enough to influence the price movement or they are feeding you fake signals; this is the only way stop hunting can work these days. And even so, if you do not use SL, it won’t affect you even if the retard notion of stop hunting is actually going on. Just take a gander at any forum, it is a gathering place for failures.

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