Stop-hunting is NOT the problem some people say

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John Forman - The Essentials of Trading author

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.

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Here are some other posts which might interest you:

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Where should I put my stop and take profit orders?
How do market makers adjust prices?
Understanding the different types of market participants