Stop loss hunting and how to deal with it

December 2, 2021
Reading time: 5 minutes

Stop loss hunting happens every day and most traders are not aware of how this exactly works. Most liquidity providers and some brokers use software to hunt stops and this is a very lucrative business scheme. Since brokers promote using a stop loss, they know exactly where you want to take a profit or a loss . In this article I will describe how and when stop loss hunting occurs and how to deal with it.

What exactly is stop loss hunting?

First you need to understand the difference between stop loss hunting and market manipulation. They are often mixed up. Price manipulation as we know it, is done by institutions and not by brokers.

For example; If a hedgefund wants to buy EUR against the dollar, they try to buy them at the best possible price. The lower the price the better it is. Their dealers will calculate what it will cost to lower the price with 50 pips. If they want to do a 5Bn trade, it’s a good bargain to drop the price with only 500Mio. Since they can see the bids and asks they know when to enter the market and let their algos do the lower bidding. This part is hated by all retail traders desperately clinging to their stop loss orders. Now the price will start to spike down after after which it will spike up and will most likely continue to go up.

This so called “buy or sell zone” is what many daytraders use to their advantage. Some indicators can be useful to spot these buying or selling zones. Unfortunately one will never be sure if the spike is indeed due to manipulation or if it is a whale going short.

Market manipulation, though toxic, is something all traders need to deal with. Stop loss hunting on the other hand is a malicious practice done by dodgy brokers / liquidity providers to turn your trades into losses.

So please share this article with your friends, the more people are aware the better it is.

How is it done?

How many times were you looking at a trade that got stopped out after which the market went back into green territory. But.. your stop was already hit. So bloody annoying!

Since the cfd market are not traded through an exchange you will always depend of the price feed provided by your liquidity prover / broker. The most common practice to hunt your stop loss is by simply widening the spread.

For example;

Look at the chart below and notice the spike below the red arrow. As you can see, 2 contracts long Gold were stopped out.

The spike did clearly NOT hit the stop loss level. However, the broker stated that this happened due to the “Asking Price” at market opening. The spike only shows the “Bid Price” and not the “Ask Price”. Basically this means that brokers or LPs can give any price feed at their convenience. Don’t forget, they can SEE where your stops are placed!

The most popular timing for this procedure would be at or just after market close or at market opening (Sunday night). This is one of the main reasons to use an ECN account where you can at least check the bid and the ask price. Choose your forex broker wisely!

When does it occur?

Although it typically happens at or after market close or at market opening stop loss hunting can still very well occur during the day. Liquidity providers as well as brokers use software to make the job effortless. Every time your stop loss is near the current price, they simply widen the spread.

How can I recognize stop loss hunting?

It’s very hard to detect stop loss hunting. Since brokers don’t do it constantly, but only when it pays off. For example, a big level is a nice spot to take free money. EURUSD breaks 1.1300 on the way down, thats where many stops will be located.

I usually video tape the tick chart and try to spot fast moving prices where I have another platform from a different broker open as well. If I detect a difference I report this with my broker. It might happen some brokers repay you some money avoiding bad publicity. Bottom line: if you see it happening, switch your brokers asap!

How to avoid it?

You can never really avoid this from happening. Liquidity providers have much better tools to play around with.

What is important is how to use a stop loss and where to place it. Also, consider to always close your position at least one hour before market close.

How to place your stop loss to avoid stop hunting

Don’t place your stop loss close to support or support levels (H1 or higher time frame)
Don’t trade or place your stop loss too tight during news events.
If you risk more than 10% of your account when using a 50 pips stop loss, trade with smaller lot sizes.

Let assume you trade Gold. If you are long at $1805 and your stop loss is placed at $1800, you can be sure that your stop will be hit overnight. A $5 widening of the spread at market opening is nothing for an LP. Therefore better put your stop much lower around $1790. If this means your risk reward ratio is bad, then.. don’t make the trade at all.

Another option is to use a forex robot that hides your stop loss and take profit levels. Its a very useful trading tool In case you are interested in this software, feel free to contact us.

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Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

How to choose a forex broker

December 1, 2021
Reading time: 9 minutes

Forex broker wanted! Sounds easy, but how to select the right one for you? Choosing a forex broker is a time consuming matter and moreover a hassle. You know it’s important, but all forex brokers look the same so where to look out for. In this article we will explain where to pay attention to and how a broker looks like “under the hood”.

Why do I need a forex broker?

Whenever you trade, your orders will be send to either an exchange or, like in cfd trading to a liquidity provider. To have access to this liquidity for several asset classes you need a broker. It’s like a market place where your buy order always finds a seller. A broker is “the middle man” and sends your order to a liquidity provider (banks and spv’s). Another reason why broker are needed is the leverage at which you can trade. Forex brokers allow you to trade with a leverage, giving the opportunity to trade 30x or even 500x your initial investment. With only $1000 you can move $500K in the market.

How important is regulation?

Regulation is one of the most important aspects that needs to be verified. Without a decent regulation, your money is at instant risk. For example if your broker is located on a sunny island, you can already tell that regulators are not as organized as when the broker is located in London or Frankfurt. Things like money withdrawals, trustworthy banks, stop hunting are all matters you have to consider in case you would opt for such a broker.

I am not saying all those exotic island brokers are bad, but fact is, they are there for a reason and have more “freedom” than a European or UK regulated broker. The #1 reason why many brokers offer an off shore route has to do with the fact that in Europe the maximum leverage they can offer is 1:30. And that rule made most brokers decide to have an off shore brokerage service. Looking at the huge numbers of high leveraged traders, it appears that these brokers are right…traders just love high leverage.

Spreads and commissions

For any trader, the costs are an important factor. Thus yes, fees are relevant. However, most brokers offer the similar commissions and spreads. Because many brokers use the same liquidity providers it looks like there is not much difference. However, whatever a broker advocates, it’s not always what you get. Especially a fast execution is extremely important, something that is hard to check.

We like to believe that a $10 fee for a standard lot is more than enough for brokers to still make a buck. That results in a 0.10 pip all in spread or $8 round turn in a raw ecn account. For smaller accounts the fees could a bit higher as well.

Bear in mind that if you are introduced to a broker the spreads might be slightly higher.

ECN, STP or Market Maker

Some years ago forex brokers introduced the “raw ECN account”. At that time something new, since pretty much all brokers at that time were market maker thus took the other side of your trade.

So what is the difference between these broker models?

Market maker

A market maker will always take the other side of your trade. They are your counterpart. This means that the spread you will see on your screen is fixed. Many brokers like this model since it allows them to advertise with “trading at zero costs”, which in fact is not true.

A market maker employs risk managers, who are dealing with a lot of stress. After all, they have to decide whether your trade needs to hedged or not. Common practice is “netting” which means that at each day only the nett long positions or nett short positions will be hedged. For example, if there are 1200 contracts long the EURUSD and 1000 short, the risk manager could then hedge 200 longs.

Thats why regulation is so important since brokers need to always check if their solvability is complying with the rules. If you trade with an off shore market maker there is a reasonable chance that in case of bankruptcy, you will not see your money back. Chances that this will happen are much higher because the local regulators simply check these companies rarely.

All and all it always looks funny when a counterpart broker offers their clients trade schools and academies knowing they only benefit from their clients losses.

Whats positive about this type of brokers is that you can trade micro or even nano lot sizes. This allows you to trade in a live account with just a few bucks. Still, be aware that a lot of these brokers are not there for your interest!

ECN / STP

An ECN broker connects traders straight to liquidity providers (Banks or hedge funds, institutions). For doing so traders are charged a commission per trade. A big difference is that trading in an ECN account you will be able to see the bid and ask prices.

If your are trading with let’s say a few hundred dollars I don’t think it will much of a difference. The moment you start be a more experienced trader with larger trading volumes or you prefer to trade with forex robots, then an ECN account is the most obvious to select.

Deposit and withdrawal fees

Simply put, do not pay for any withdrawal or deposit. In case a broker does charge for it, you could do a wire transfer. By choosing a broker you could test the speed of withdrawing money from your account. Just make a withdraw request and see how long it takes.

Lot size

Many online forex brokers offer different account types ranging from standard accounts, to mini accounts, to micro accounts. The size of the account depends on the lots that you wish to trade.

Basically you can trade with 3 different lot sizes;

A standard lot is a lot that consists of 100,000 units of the base currency
A mini lot consists of 10,000 units of the base currency
A micro lot consists of 1000 units of the base currency.

Which trading platform should I use

In cfd trading the most popular trading platform is undisputable the Metatrader 4 terminal aka MT4. It’s younger version is the MT5 platform but still did not surpass it’s younger sisters popularity. Another platform that can be used is cTrader which is also compatible with many brokers.

Some brokers such as Saxobank opted to offer their own trading terminal.

For new traders the MT4 platform is probably the best choice. Simply because its very easy to understand and therefore it has a short learning curve. There are enough indicators at your disposal, it has a great EA market place and charting is pretty much ok.

A trading platform always comes for free once you open an account with a broker. All platforms do offer a trading app which makes trading easy on the go.

What leverage

Leverage is one of the main reasons traders lose money over time. My advise is to be very careful with using a high leverage, since markets only need a little volatility for your account to blow up. The most used leverage is 1:400 but can only be offered via an offshore route. I think it’s fair to say that a 1:30 leverage is the best way to start trading with. It’s less risky and because of a lower leverage traders tend to lose less.

Clearly if you are an experienced trader, a higher leverage does not necessarily mean a larger risk as long as you know what you are doing. Furthermore, a higher leverage also means that profits can be substantially higher.

If you are a new trader, it’s recommended to opt for a 1:30 leverage. Firstly you can trade with an EU regulated broker and also your risk factor will be lower.

Customer Support

Customer support is for some traders the most important variable to choose a forex broker. I trade with over 7 brokers and I have to say that support I am receiving is similar. Due to sophisticated CRM systems, brokers managed to automate their support.

But, in case you want to see tick data or perhaps a question about a stop loss that was hit, it could take more time for a broker to respond.

I always like it when I see a name showing below an email including a direct phone number and address. Problem is often that the larger the broker is, the longer it takes to get a response. For example, try to get help from a chat operator, could take over 30 minutes!

For me personally support is not a big deal. Trading with MT4 is stable so no technical issues occur and for trading advise your broker is probably the last person to contact.

Conclusion

By choosing a forex broker just use your common sense. Things like regulation and withdraw policies are the most important factors to consider. Check out some independant review websites such as trustpilot and see how other people share their trading experience with a forex broker. Make sure you check if the review looks genuine since many of these reviews are fake. Welcome to the internet era..

In case you are new to forex and you are looking for a broker, you can always contact us where we will try to help you make a good choice.

Test a strategy risk free!

Every week we start with new algorithmic trading strategies that you can copy in a demo account

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support@youralgo.com
Keizersgracht 241 Amsterdam The Netherlands