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Why traders trigger stops!

The easiest way to describe this is with an example. Let’s take EUR/USD yesterday as an example. The price was sitting around 1.3060 for much of the day but interbank dealers, many of whom chat with each other, all had pretty similar order books with heavy stops below 1.3000.

The dealers faced two obvious paths:

  • Do nothing until the stops are triggered and then start selling to fill the orders. Remember that the dealers know there are plentiful stops below that level. Once 1.2999 deals, the dealer must start selling. If he’s got EUR300 million worth of stops, they will probably not be filled better than 1.2990 on average? The dealer makes no money and the customers are very annoyed at the bad fill!
  • The other alternative is to start selling in increments as the price starts falling. It could be something like this; sell 20 at 1.3060, sell 20 at 1.3050, sell 20 at 1.3040, buys back 30 at 1.3030 when price starts to stall, starts selling again more intensely once 1.3020 breaks, selling 30 at 1.3015, 50 at 1.3010, 100 at 1.3005 and then sell really hard through 1.3000 to ensure that the stops are done. This way, once 1.2999 deals (and he will make sure it does) the stops are filled at 1.2997, the customer says ‘good fill, not happy but good fill’ and the dealer makes $400k profit!

That’s why dealers chase stops.

  1. Good read. Thanks Sean. One qustion though, do you mean when 1.2999 deals, the dealers are not actually selling(stops) since they’ve already done that well in advance?

  2. They still need to trigger the actual stop-loss orders which are only done once the mkt trades below 1.3000. I’ve known instances where dealers targeted huge stops, particularly in USD/JPY, but then ran into a massive order within 1 pip of the stops and couldn’t break though the level, forcing them to abandon and cut whatever positions they had built up. btw how you going with EUR/CHF? I’m getting frustrated with it already, don’t know if I can last another week 🙂

  3. Sean, the biggest question for me is how do they detect a situation where they can allow themselves to start stop loss or TP hunting?

    If I take your example, if they sell 20 at 1.3060 and at 1.3050, and then suddenly the price spikes up to above 1.31 (for some reason), they will be at a loss, isn’t it?

    So when dealers start chasing stop losses they must know that all the other big players are out of the market and that there is no news to interfere with their activity. That means the dealers have a very good visibility on the market…or in other terms, that the market can be fixed during some windows of time.

    Let’s imagine that the big guys. DB, Citi, UBS, Barclays, etc talk to each other. They probably know what the various funds are doing (hedge funds, corporate orders, macro funds, etc) since they are their clients. So by sharing this information between themselves, they can “screw” their clients, isn’t it?

    Conclusions:
    – the market is fair when there are little stops left!
    – Big banks know the game and this is why they are the main winners in the FX world.

  4. Last conclusion is correct Iridium, the big banks make massive profits from FX. Of course there are times when they get caught on wrong side but mostly they don’t

  5. Now we need to put wire taps on the lines of the FX desks of all these big boys, and we’ll get rich very fast 😉 That’s the best technical approach ever 🙂

  6. Sean,

    You hearing anything on GBP/USD. crazy spike of 40 pips while I was away. I was in profit of 20 pips and got whipped apart in the last 2 hrs.

  7. It’s still there. My stop is below 1.20 for now. However if it fells below 1.2050 I might consider cutting it. Effictive break of 1.2050 changes market sentiment for me.
    I really don’t see much downside for this trade(Other than the interest my broker keeps charging me every day, three times today, lol). Risk is limited. Spain and Greece are going to be saved. It just takes awful long time with European politicians. I’m not too confident whether anything meaningful will be done in two weeks though.

  8. So as a retail trader whats the best way to counter this? reduce leverage and have wider than usual stops?..the way i see it, this allows for only two types of players in the marker.
    1. the ones with a really long time frame, who are able to withstand an 80 pip move against them with ease.
    2. the ones with a much shorter time frame, who’d trade the counter trends and is rarely caught on the wrong foot.

  9. Many thanks Sean, very useful to know how Forex market works, so if i want increase my FX strategies i have to meet a interbank dealer 😉

  10. You prolly don’t know hw valuable you are to all your readers but if u asked me,i would say,heaven sent u to us.Thank u(from the bottom of my heart).

  11. Good morning Sean!
    My position in a cable is closed today at the price of 1.5977, got profit of 200 points, there something was today serious of orders, strongly redeemed pound, you didn’t hear Sean? USD/CAD in game, I think of sales of AUD and NZD, NZD I think to sell from 0.8262, still it is possible to add counting upon a thorn from 0.8310 or about that with a stop is slightly higher, if means allow, a stop to put for 0.8250. Also bought euro, the market didn’t take away 1.2915, but purchase on 1.2925 was made, in this area from that week there was a volume on purchase according to my information. It is more than ideas while isn’t present. Successes to you Sean! You hold still the EUR/CHF?

  12. Excuse, a stop to put for 0.8350, the sale purpose (I all the same insist on the area 0.80-0.7950), is my typographical error

    1. > Sean, sooner or later EUR/CHF will make the profit, only certainly to wait very tiresomely. Successes to you if these expectations are materialized shortly!

  13. In USD/CAD steam made correction of a position, reduced sale from 0.9975 exactly by a half, put the same volume (that that was reduced on sale today) in the postponed warrant on sale from 1.0063, the purpose yet didn’t change 0.96 or about that.

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