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By: Igor Stanko
Okay, right from the start, 'stop hunting' is NOT a myth! Stop hunting takes place every day, sometimes in a very subtle way and it WILL end up costing you a lot of money in the long run, month after month, year after year.
But first, what is' stop hunting' and more importantly, what can you do about it to protect your trading account? (Please note that what you are reading here does not reflect all brokers and does not necessarily imply that all of them are dishonest.)
Stop hunting is a very nasty trick some brokers play. Your "friendly" broker manipulates the price when it gets close to someone's stop (or to where a large number of traders have a stop) by creating an artificial "spike" (a sudden and mysterious price move) just big enough to cause at lot of orders to be stopped out, yours included of course.
As a result YOUR money is instantly transferred from your trading account to his pockets!
Let's take a simple example. You are a Forex trader and you buy 1 standard lot of EUR/USD at $1.4515. You then place a stop at $1.4500. Your broker sees your stop and a lot of other stops at the $1.4500 level, he then creates a spike (a sudden and inexplicable price move) and the price is now $1.4500 or even lower and bingo, you (and many other traders) are stopped out and he pockets your trading money, simple as that.
Did you know that stop hunting is at least 10 times more profitable for brokers than collecting the spread (and/or the commissions) on each trade?
After all, why collect a few pips or points here and there when he can simply steal the WHOLE trade? Stop hunting is like a poker game where your opponent can see through your cards and then adjust his game accordingly. For some crooked brokers, it's like stealing a candy from a baby. Plus they can do it all day long and some even use special software that will do all the stealing for them, 24h a day, on auto-pilot. By the way, did you know that stop hunting is not even illegal?
Another way to rob you via stop hunting is to widen the spread at the right moment. The net effect on your trading account is the same, you are stopped out and your "friendly" broker gets to keep your money. And if you complain the usual (B.S.) answer is this: "Sorry Sir (or Madam), the market moved against you, it's beyond our control"
Of course when you check the prices on OTHER forex trading platforms, the spike that you saw on your Forex trading screen is nowhere to be found, it was deliberated created by YOUR broker because he saw a profitable stop hunting situation and he (or rather his special software) took it.
Sure, but what can a trader do about it then?
Well some traders simply recommend a mental stop. That means you do not place an official stop on your trading platform, that way your broker cannot see it. Then when (and if) your stop is hit you simply close your position manually. Obviously if your broker cannot see your stop he cannot go on a stop hunting trip against your position.
However, this method has two big inconveniences:
First of all you are now forced to watch the trading screen all day because you must watch your stop level and close the trade manually. If you are a day trader like me and/or you place a lot of different trades that - extremely stressful - task quickly becomes impossible.
Secondly, in fast moving markets like the Forex market (especially when the economic indicators are released to the public), the price can suddenly move against you by 200 pips (or points) or more and it's way too late to act on your mental stop, you are already suffering a big loss, way past your mental stop.
The other way to protect your trading account is to use wide stops, like 200 pips or 500 pips (or points). Obviously, your broker is not suicidal, he is not going to move the market that far just to make money on your particular trade, so he will leave you alone when he sees that large stop. But let me ask you a simple question: Do you really want to take that kind of risk? What if the market REALLY moves against you by 500 pips while you are sleeping, would you be able to stomach a $5000 loss in your trading account when you wake up?
As you can clearly see, the usual stop-hunting "solutions" given by many "insiders" are not practical and way too risky!
So what's left then?
Well you would be very pleased to know that there is indeed a sure-fire, hand-free way to protect your trading account against stop hunting once and for all. This system is also fully compliant with the new FIFO regulations. Stay tuned for more forex trading tricks and tips that could save you thousands of dollars each year.
About the author:
Igor Stanko is a full-time FOREX day-trader and a computer programmer. For more information on how to really eliminate stop hunting once and for all simply visit the following website: http://forextrickstipssecrets.blogspot.com/
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Tuesday, February 16, 2010
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