"IntelliTraders" 
Stop hunting.

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Thu, 01/26/2012 - 10:10
#1
Geppy
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Stop hunting.

These principles apply outside of the forex market as well. I think they were posted on the babypips forum by user eremarkets.

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Thu, 01/26/2012 - 10:11
#2
Geppy
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Joined: 2010-10-22
Posts: 86
Points: 280
 Money. I love you. I say

 

Money. I love you. I say this because I feel a bit bad about always picking on you! but really man...much respect for having the guts, and the temperment, to wear the target for my arrow, because I believe it will make me, others, and YOU a better trader in the end. And I think this is what it's all about.
 
Now...with that being said! make NO MISTAKE about it guys. There are some VERY POWERFUL, SMART MONEY traders that are indeed AFTER YOUR STOPS.
 
not nearly as many times as the beginner may think...but much much more than never.
 
You see...stops tend to gather in specific areas on a chart. Right above or below recent highs and lows.
 
Large traders with large orders to fill can't just get in and out of the market anywhere they want. They are too big...and the
 
size of a large order hitting the market at one time will push price against them...they will experince some pretty MASSIVE slippage. Try to short 50 million in gbp/usd at one time, and by the time your order is done filling, price will have sold off 10-50 pips (depending on market conditions).
 
This is a problem for them. This means every trade they take opens for a WORSE price...and when the close it..it closes for a WORSE price as well. 15 pips of slippage on the front end and 15 pips of slippage on the back end is a MASSIVE disadvantage!
 
Even if your targeting 200 pip moves...that still cuts your edge down by 15%. So...now you are way behind the curve on every trade you take.
 
Hmmm...if only there was a place where they would be able to fill their orders without this slippage. Well...guess they would need someone to take the other side of this 50 million gbp/usd order they want.... if only they knew where they could find a LARGE BLOCK OF BUY ORDERS AT A TIGHT PRICE RANGE....they could fill up without slippage....
 
hmmm...and where could that large block of buy orders be....I wonder?
 
Oh right. how about above the previous high? you know...the one where everyone went short at or below.
 
So, if they can make a good educated guess that above such-and-such price level, and determine it will have...say 50 million in stop orders there... they will ABSOLUTELY be willing to push price up...just to trigger these stops so they can fill most of their order.
 
Say...they determine that where price currently is...it will only have to buy 10 million in gbp/usd to push price to the level where they believe they will find this 50 million of buy stop losses (a stop to buy and cover for all those who are short)
 
At that point, they will absolutely buy 10 million of gbp/usd, which will push price into that block of 50 million buy orders.
 
Then,...they get to cover the 10 million they just spent pushing price up (the cover by selling the 10 million), and they get to sell another 40 million more WITHOUT PRICE DROPPING A SINGLE PIP!
 
 
See...thats because 50 million of buy orders are sitting up there. (people often waiting to cover their shorts...and potential long players who have limit orders there and are waiting to "buy the breakout long")
 
So...
 
1. They make money going long, and poppiing many the stops of those who are short. They make money buying up the market.
 
 
2. They then unload their entire 10 million position they just acquired...at the top of the move. They then also get to sell off another 40 million at that same price point...because there are still 40 milllion of buy orders, both stops and long limit orders...right there. So, they fill a 40 million short position at the top of the market, without any slippage.
 
 
3. They still have 10 million they need to sell...and now, supply exceeds demand. So...as they sell that last 10 million...the start to crush all the people who just went long because they thought they were smart and would "buy the breakout". This forces these new long positions to cover. And how does a long cover? u got it. by selling.
 
 
4. This selling of the longs as they cover their now losing position pushes price down even further...giving the larger institution a healthy profit from the start.
 
 
Sounds tricky? it sure as hell is. Sounds exotic and sophisticated? you betcha. Sounds likely? you better darn believe it!
 
 
See. they HAVE to do this...it's not a matter of choice. Otherwise...they will start every position they have with a massive loss of slippage as their order pushes the market away from the price they want to get in at....
 
 
that is, unless they can find a tight area with a lot of stops/limit orders
 
 
So they do.
 
 
By the way... knowing where your orders are is a big business in and of itself! Many large investment banks buy the "orderflow" from brokers...such as charles schwab, e-trade...ameritrade...and many others (at least in the stock market)
 
 
And I'm sure this is one of the reasons why many of the larger forex brokers have been aquired or have been bid on by potential investment banks.
 
 
So they can make money setting their customers up to trade with. AND, so they can make even more money using their customers stop placement to fill their own orders for a nearly guaranteed profit...at least initially.
 
 
This is a gross oversimplification...and i'm ignoring many other components of what makes a market move, and the other players...etc...
 
 
I may be overstating the value of retail forex orderflow...and whether larger financial institutions really do find a great value in it (I know for fact they do in the stock markets)
 
 
but make NO MISTAKE ABOUT IT. your stops are targeted. all the time.
 
 
The market will always move in a way that makes the most people lose the most money most of the time.
 
 
i'm not talking false broker spikey "stop hunts". i'm talking larger institutional buys and sells to push price into areas likely
 
to have many stop losses/limit orders there.
 
 
It hurts those short now. as soon as it fills, it hurts the new longs. Both get squeezed out and cover.
 
 
I know profanity isn't really allowed here...but basically, understanding market microstructure, the players and their motives, supply and demand...and it's twin sister: orderflow. These 4 concepts are the secret.
 
 
Otherwise... it's really just about you getting ****ed
 
 
I sometimes don't even know why I tell so much here about this type of stuff. I hope i'm not cutting into my own paycheck. This post, and a lot of thinking and observation should be all anyone needs to make a LOT of money, a LOT of the time.
 
 
To be a profitable trader, just find out how the market must move to hurt the most amount of people. Then, you will know
 
exactly what will be coming up soon!!! Cold...but true.
 
 
P.S. to get an idea of how the game is really played, get the book market wizards 2. read the 1st chapter on currency trading. there is a very good story there that give you an idea of just how they are actively looking to take your stops out.
 
 
P.P.S. for all of you who got your stops hit this week by a few pips, only to see price rally all the way past your original target... Thank you! You made this post possible as your stop paid for my entry, and thus paid for my time here
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Thu, 01/26/2012 - 10:11
#3
Geppy
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Joined: 2010-10-22
Posts: 86
Points: 280
 c'mon order flow 2nd nuggetI

 

c'mon order flow 2nd nugget
I see it like this guys... fundamentals are fine. But they have to be put into the proper light, so to speak.
 
The market tends to focus on just a very few core issues at any given time. RIght now...it's the euro problem. This past week, it was bond yields of potentially problematic euro countries.
 
But the actual facts are not important for an intraday, or dare I say even a swing trader. It's how the market FEELS about these facts. IE: sentiment. bond yields just under 7% for a developed G20 country is TERRIBLE fundamentally, but...better than OVER 7%.
 
So, the negative sentiment relaxes. For many traders, for many reasons, this gives them reasons not to sell more...or even reasons to buy. Good place to cover shorts, as one trader anticipates the euro will not continue to fall far without at least a retracement...so this person covers. Another who planned on shorting doesn't...because the sentiment is becoming slightly more positive...AND the market is now starting to move up (because the guy who covered short pushed price up a bit as he covered). Companies that do big business in the euro feel a bit more relaxed about putting more money in the euro to follow through with potential business plans since the feel a little more confident, and price is now starting to move up after all... etc... etc..
 
So, once the larger speculative players see sentiment changing...and trend changing... they often seek to get long (as in this case).
 
But again, we run into a problem with liquidity. So... they may very well wait for a fair amount of aggressive buyers to jump in and place their stops...only to smile, because the stops of the early pioneers in this emerging move to the long side will provide the liquidity they need to fill THEIR long positions.
 
So, now they can push price DOWN by selling a large amount. As soon as they hit the stops of the early long players... you know, the "sell stops". they buy back what they sold to push the market down...and also fill a large portion of their intended long order.
 
With all the stops gone, this temporarily empties the market of resting sell orders. They just consumed every resting sell order (the stops of the guys who were long) between the high of the move up...and however far down price was pushed. With every sell order between the previous high, and where they found the liquidity (ie: stops) that they needed to fill up... there are really no more sell orders left in the market now are there? Well...at least not from the recent high...to the new low.
 
Sure, some will execute at market..but these are primarily retail traders, making emotional decisions. The fact is (and studies have been done on this) that the majority of more informed traders use limit orders more than market orders.
 
So, we really only have the relatively emotional, retail guy jumping in to sell that drop. The retail guy is NOT the guy who moves the market. The commercials and the large specs are.
 
Now, with resting sell orders wiped out, and this large institution buying large blocks...which way is price likely to go?
 
Any willing seller has just been taken out. If they are still in their trade...FINE! they will have no ability to hold the market down, as they ALREADY SOLD SHORT when their stop for their long was hit... and therefore the influence they have to affect current price is gone...unless they decide to sell short again, as a reverse to their original position (which was long...and just got stopped out with that stop that sold off)
 
so lets consider who's left to go short. we know most larger speculators place carefully planned, predetermined limit orders. They are not likely to be jumping in to sell short on sharp spike down over the last few minutes or hours. Furthermore...they tend to be good at reading market sentiment. They are good trend traders in general...and will ride out the trend caused by this sentiment. If sentiment is improving...they are NOT likely to be going shorter...and may even want to cover.
 
This in fact makes them more likely to cover as price drops... because a short trader wants to cover at the BOTTOM of a move. (thats where they make the most money). So... if anything, they will have a long bais due to improved sentiment and changes in price action... and since they have likely been short during this overall move down...theyh will...if ANYTHING, want to cover those shorts...or get long.
 
Either way...it produces pressure to the UPSIDE.
 
We know commercials buy or sell against the trend... as they are not in it for profiting off directional moves. essentially, they are hedging time. So, they COULD be a seller as price would move up...except they plan their orders out days, weeks, months, or even years in advance. Any order they WOULD have had to sell would have been placed above current price... and since our brave pioneering "first to go long" traders already pushed price up to that recent high... we can assume any commercial interest that had a sell order would have already been completely absorbed by the market...at least to that recent high before the drop.
 
We know this because we know commercials trade counter trend...always. and they plan trades long in advance. a few hour drop is not going to be enough for really very many (if any) to put new orders in between the top and the bottom of this push down. And besides...they genreally put orders in above/below recent highs/lows. Not in the middle of move down lasting a few hours.
 
So, the only traders left to sell are the silly little retail guys (I know...because for years I was that silly little retail guy!)
 
And... the largest players (commercials) won't likely be selling much, if any, between the low where the stops are triggered...and the recent high.
 
 
And the 2nd largest group (large speculators) if ANYTHING will be buying from that point. because they don't want to be so short when the sentiment turns up (it's risky for them if they think others will buy...so they have to buy to make sure they don't get squeezed and lose their profits!). Or...they may even want to go net long. In either case. they won't likely sell more after such a drop in price, in the face of changing sentiment, and after price action has started to move up. They have every reason in the world to buy.
 
This just leaves small speculators to sell. They are less than 10% of the forex markets, and are the smallest segment of the three groups in any market (futures, commodities..stocks...etc).
 
And of course... not all 10% will try to sell. some longs that got stopped out will re-enter long. others will just go long. whatever.
 
Point is... over 90% of the trading community will NOT be going short now, and really almost none from the two most important groups... commercials and large speculators.
 
So now mr. retail - you went long...you got stopped out... and the market rallies up.
 
The commercials didn't care much to start with...they won't start selling until after price pushes past the recent high that Mr. Retail took it to.
 
The large speculators wont sell..heck, they are trend followers...who watch fundies and sentiment to determine when that trend is changing. Better Euro News? even if THEY dont' want to buy...they know that SOMEONE out there with big money will want to buy... and they will lose money on their open short. so they buy. if for no other reason than to reduce exposure, and take profits.
 
So Mr. Retail watches price move up...up and away. as large specs reduce their short exposure... and take profits...and even go long on this improving news.
 
It's too bad Mr. Retail got stopped out, and was totally confused by all this though. He was right on direction, after all. he just didn't consider that his stop was going to give a large speculator a great fill on HIS long...the long of "smart money" that will push the market up, up and away.
 
There you all have it. This is how fundamentals, sentiment, and technicals all play together.
 
So, when sentiment changes... pioneers first. large traders use their stops to do the same thing as the pioneers (generally), but use the stops of the pioneers to get in the market. and commercials are a mute point unless we get higher or lower in price from recent highs/lows.
 
It can get more sophisticated than this...and this is an oversimplification... (believe it or not), but I hope some of you open minded types can start to get a more complete picture of how this all fits together.
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