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A question came up during the webinar last week regarding stop hunting. One of the attendees was curious about it, no doubt having heard the term bandied about among retail traders. This gets brought up on a fairly regular basis, mostly by folks who saw their stop get hit in a market that quickly reverses back in the direction of their trade (see Stop-hunting is NOT the problem some people say). Let me try to clarify things.

A definition
First, let me explain what exactly stop hunting (running) means.

Basically, what we’re talking about here is one or more market participants attempting to manipulate prices such that the market reaches a level where preset orders are believed to reside in order to trigger those orders. Notice I didn’t specifically say “stop” orders there. They could be stops or limits. It doesn’t really matter. Those attempting to hunt those orders are just looking to get them triggered for their own purposes.

Why stop hunt?
So what are those purposes?

Imagine there are a bunch of buy orders residing at 100. What is likely to happen if the market hits 100 and triggers those orders? The market will probably go higher, right? If you know (or think) those orders are there and have the ability to push the market in that direction, can you see how you might want to trip those buy orders and then sell into the subsequent market move either to take profits on a long position or to sell at a better price?

This sort of thing has been going on for many, many years. Stories have come out of the futures trading pits (and probably from stock exchange floors too) for ages. It also happens in the inter-bank market where the primary pricing of forex rates is done.

Where retail forex is concerned, stop hunting is generally talked about more in terms of brokers manipulating prices. The fact that some retail brokers act as counter-party to their customers trades (market-making or dealing desk brokers) rather than acting as middle men (ECN or Straight Pass Through brokers) is seen as incentivizing said brokers to move prices against their customers to trigger their stop loss orders so the broker can profit from customer losses.

The reality
Back in the early days of retail forex there probably were unsavory brokers who manipulated prices to their advantage, and may still be in certain corners of the globe. Things have gotten much tighter in recent years, though, so if you stick with a reputable firm you’ll be free of that sort of abuse. In fact, as much as some like to bad-mouth the new regulations put in place in the US by the NFA and CFTC, part of what they have done is to put brokers under a spotlight to ensure these sorts of things don’t happen, and are punished if they do. In fact, one forex forum member put it to the test and found no evidence of stop hunting by retail forex brokers.

In other words, if you get stopped out on a price spike, it’s not your broker stop-hunting you. They get their prices from the inter-bank market, so if there was stop hunting being done it was almost certainly happening at that level.

Stop hunting will continue to go on in the markets, but it’s not something you should worry about. If you trade for any length of time you will inevitably fall victim to an adverse price move that takes you out of a trade only to see it reverse. There are any number of things that can make that happen. Where you are concerned, it’s either bad luck or bad stop location. A lot of those who claim they were stop-hunted just placed their stop too close to the market and either don’t realize it or don’t want to take the blame for poor decision-making.

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