Market Overview

Do Brokers Hunt Stops? The Answer May Surprise You!


You know, hardly a week goes by that I don't see someone online complaining about a broker hunting their stops. And it really makes me sad, because it’s such a terribly flawed view of the situation.

So today I’d like to take a few minutes to clear up a few things about that subject and offer some advice to those of you who frequently see prices reverse after your stops get popped.

The question is; do Forex brokers hunt stops? My answer would be absolutely not. Not ever.

Strong claim right? Well, I have no trouble making it because the truth of the matter is, if a broker WAS hunting peoples stops via artificial pricing,  as people who make the claim often assume, they would very quickly be out of business.

It’s easy to see how a broker pushing artificial pricing to trigger your stop would be advantageous to them. After all they make their money via spreads. So, if they can force you to close and re enter a trade they are going to make more money.

But that ignores the very real risk that a broker would have to take in order to earn those extra profits. You see, here's the thing;  if a broker pushed a fake price to you, and only you, it would be an easy task to ask another trader who uses that broker what the price was when your stop got hit.

If there is a discrepancy between the pricing they gave you, and the pricing they gave their other clients, it would be extremely easy for you to contact the regulators, show them the evidence, and land the broker in a ton of hot water.

While OTC Forex is still considered a bit of a Wild West market, there ARE specific regulations on the books (at least in the US) about this sort of activity. And if a broker was caught doing it, they would quickly lose their license. And without a license, they can’t do business. So in effect, if they got caught, the regulators would shut them down.

So a broker pushing custom pricing to you in order to trip your stop just isn't going to happen, it’s too risky. It would be too easy for them to get caught.

Now with that option off the table, the only other way they could potentially hunt your stop, would be to push fake pricing to ALL their clients. And then they would REALLY be in trouble. Because it would create a risk-less arbitrage opportunity that anybody could exploit.

All one would have to do is setup an account at the shady broker, and an account on an institutional ECN, wait for them to push some of these fake prices, and then lever like crazy out of an arbitrage trade against them. And since their pricing is “fake”, one wouldn't be able to hedge the exposure and that's going to hurt them pretty badly every time they do it.

So let me ask you? Given how much it could potentially cost them to hunt your stop, how realistic is it that a broker would risk it and come out ahead? Not very likely, I say. And that's why I can safely say that no broker is ever going to hunt your stop. It’s just not worth it to them.

Now, that having been said, I should probably warn you that there ARE people hunting your stops. Plenty of them, in fact. And I know this because I happen to be one of them.

I know exactly where your stop is, and it really doesn't matter whether you send the order to your broker, or keep it in your head. The fact is, as a technical trader, you’re very predictable.

I know your stop is sitting just beyond the last swing high or swing low. And I know you think that the support or resistance level is going to protect you, but it won’t. I, and the many people who do what I do, are going to run through that support or resistance, trigger your stop, and transfer your money into our pockets. Because we have a better understanding of market mechanics then you do.

And that's the real problem. You wouldn't have to worry about your stops getting hunted if you took better trades. If you had a better read on direction bias, or your timing was better, and you stopped doing the same old tech nonsense that every else does, your stops wouldn't be at risk.

So my advice to all of you, who are struggling with your stops constantly getting hit, would be to stop blaming your broker and accept that your stop is getting hit for a legitimate reason. Accept that the losses you’re taking are a signal that you still have much to learn and focus on learning what you don't know.

Because that's the only way you’re going to stop the bleeding and start putting money back in your pocket.

Hope it helps and may Luck be with you.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets Trading Ideas


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