An example of an obvious stop hunt by some market maker.

Did anyone get stopped out in Nov of 2009? I've been doing some market research and came across what looks like a pretty obvious stop hunt. The image below shows when the EUR/USD poked above 1.5000 on November 11, 2009. It had already gone above it a few days earlier and would do it again a few days later. This is the 15 minute chart. Before the two red lines you can see the 1.5000 acting as a pretty strong resistance. So every Joe and their grandma went short with stop losses above 1.5000.

People seem to like 30. I'd bet about 10 billion newbie traders went short and put stop losses at 1.5030. The two red lines are the London session day. This is the Alpari UK demo account chart with the first line at 8am and the second at 5pm when London closed. Asia was letting the price drop. You can see someone in London pushed the price up to almost 1.5050, wiped out the newbies, took over their short positions and sold, letting the price drop again by the end of the day but at a much better price than before. The MACD said down on almost every time frame just before London open. I drew some trend lines to show the momentum was failing.

I understand brokers can see your stops but I wonder, since the brokers place orders with large banks to get liquidity, can the large banks can see the stops too or do they just know because it seems obvious? Do brokers place any pending orders with the banks that banks and their trading department can see? Anybody know?

Bankers can increase their profits by a few percent on a trade like this by taking out the positions of other traders. Both the Banks and the newbies see price will drop. But there is only so much selling that can be done to exhaust a move and bankers want all of it.

How to trade this? This is what I learned from this area (yes it's easy to know in retrospect):

Option 1: Stay out. This is a battle ground area that I personally stay out of. This was a bankers feeding ground that busted several small accounts so I'd stay out until the market is traveling again. "A loss of opportunity is preferable to a loss of capital." In a week or so the market was moving again. My trading has improved a lot by waiting for the right pitch. This is essentially a ranging market and I don't trade these for now.

Option 2: Wide stops (with very small position size to keep in the 2-4% of the account rule). Don't put stops 10 pips below the weekly pivot point, expecting the market to reverse there. It will reverse but not before taking your stop out. Brokers will train their clients on their sites to place tight stops to limit losses. "Place close stops, Place close stops, Place close stops , Place close stops!" Far stops are really what work here. Let the market be really decisively leaving this S/R behind before it stops you out, not just has some noise. Tight stops are easier to take out, thanks for the conflict of interest, Brokers. (By the way - don't ever let a broker tell you how to trade! They want to empty your account. This conflict of interest is real and it means brokers have to take advantage of you. The only reason to be in business is to make the most amount of money possible.)

Option 3: Trade like a banker, like a shark. On a trade like this, with a really strong ceiling but an obvious stop grabber area, let the bankers take out the stops, anticipate it, expect it. Sive Morten is expecting it and other bankers are too. Put a limit sell at 1.5050 or 1.5100 and let the price come to you. Then you'll be filling your trade with the stops of a newbie. If you're in short at 1.5050, put your stop at 1.5150 and take profit at 1.49 or some variation of this (newbies put orders at even numbers all the time which makes them even more predictable). This a 1:1.5 risk/reward. What if the market doesn't go to 1.5050 (which it didn't here) and you miss this move? It's okay. There's tomorrow. And on the bright side, you didn't get stopped out like 95% of the other traders.

If an old school chart pattern is forming on the daily or 4 hour, better to let the stop grabber happen. Expect it. Build it into your trading plan. Stop hunting is free money for bankers. It generates fear and uncertainty with small traders and this is even better for them. If I had more time, I'd pick out screen shots of classic chart pattern failures or "odd" spikes in price before the chart pattern was resolved. They were great in the 70's but bankers have figured out how to make money on them now at our expense. Ever see when the Asian session is ranging sleepily, making for a great morning break out trade, but when London opens up the price zig zags with one or two spikes each way before traveling? It shakes off the small guys who read an article about breakout trading that said "place tight stops" but who aren't thinking like a banker.

I'm sure there are more strategies and opinions on this trade. I had a great November and December trading wise but I'm still learning. Any feedback would be appreciated. Thanks to the soldiers that keep pushing forward.

 

Moderator: it wouldn't hurt my feelings if you changes the thread name to "by" instead of "my". Arrgh! How did I misspell the thread title?!