Stop Hunting Strategies

[RichardCox 10]

It is widely understood that the forex is the most widely leveraged financial asset market in the world and this has some implications that many traders fail to consider. To get some perspective, standard margin levels in equity markets is 2:1. In options and futures, these levels rise to 10:1 and 20:1, respectively. Meanwhile, many retail traders trade using leverage of as much as 500:1 for a single trade. While using leverage of this type might seem reckless to many, it is obviously still a widespread occurrence and, as a result, it remains clear that stop loss strategies are even more important in forex than in other markets.

 

Without well managed stop loss strategies, many new traders will catch themselves in precarious positions and in many cases will unnecessarily deplete their entire trading accounts. Luckily, there are strategies for avoiding this that are relatively easy to implement. In equity markets, many traders (usually using no leverage) might avoid using stop losses entirely and simply use patience to wait for prices to turn to a more favorable level. But most forex traders do use some sort of stop loss strategy and here we will look at some strategies to capitalize on the way stop losses are commonly used in forex markets.

 

Stop Hunting

 

With the unique character of the FX market, stop hunting has proven to be a successful strategy for a wide section of the market. Some traders have moral hang ups relative to this method (as it does require heavy losses to be accrued by those trading on the other end), it has to be remembered that trading is a business, not a charity and if a trader willingly places his stop loss in the wrong area, there is nothing wrong with identifying this as an opportunity and taking advantage of it.

 

Stop runs flush out weak positions and allow the longer term, dominant trends to reestablish themselves. Investment banks and hedge funds are famous for running stops as a means for generating sustainable momentum in the market. The fact is, this practice is so prominent that many traders do not even realize it and these players are likely to accrue losses as a result.

 

Psychological Levels

 

Specifically, since most traders pay attention to psychological levels ending in 00 (such as 1.3200 in EUR/USD) stops tend to be placed under or above these areas more than others. Knowing that this is a common occurrence in forex is valuable information, as it suggests that retail traders should know to set their stop losses in more unusual areas. This helps to avoid being victimized by excess volatility created by the herd mentality. Instead, traders should be looking at this more as an opportunity for profitability. Because these markets are so heavily influenced by stop loss momentum, there are many instances for short term trading opportunities.

 

Trading Setups

 

For trading setups, mirroring big speculative stop hunting requires a short term price chart and a single technical indicator. When prices are approaching a psychological 00 figure, draw horizontal lines 20 points above and below the level. This becomes the critical trading zone, as it allows for high probability and momentum based setups. Once markets have entered this region speculators will be hunting for stops on the other side of the figure.

 

Longs can be taken on an upward approach into the trading zone, with 15 point stop losses (as this level would then be outside the trading zone, and successful trades will rely on building momentum). Initial profit targets can be set at the risk level (15 points) with the second profit target set at twice the risk level (30 points. This allows the trader to quickly exit the position as the weak selling trades are stopped out and a quick momentum thrust is seen. A final point is that since these trades are based on momentum, they should only be taken in the direction of the larger trend and in conjunction with your indicator readings, which should show that the current move is not over extended.

[BlueHorseshoe 10]

This is all very interesting, but can you provide any evidence to support your claims? If I had done as you suggest above in the USD/JPY spot market at every available opportunity over the last five years, say, then what would have been the outcome?

 

Until you provide something more specific than what could essentially be a load of made up nonsense (not that I'm suggesting this is what it is, just that there is no evidence to the contrary), then this is just a nice idea and not something that has obvious value.

 

BlueHorseshoe

[traderunner1 10]

This is all very interesting, but can you provide any evidence to support your claims? If I had done as you suggest above in the USD/JPY spot market at every available opportunity over the last five years, say, then what would have been the outcome?

 

Until you provide something more specific than what could essentially be a load of made up nonsense (not that I'm suggesting this is what it is, just that there is no evidence to the contrary), then this is just a nice idea and not something that has obvious value.

 

BlueHorseshoe

 

 

I have been trading Eurdollar FX for several years now, and see NO evidence for what has been stated above -- no, i do not know the exact correlation of eurodollar FX futures with said pair on Forex, but if the correlation would be near 100%, this strategy would be pretty useless, even more so, a loosing strategy

 

TR

[Brookwood 10]

The cat is clearly out of the bag on this strategy. Maybe that's why I've seen "the zone" increase from ~10 to 15, 20 , 35 units over the last few years.

The Brookwood Triple bank-shot strategy: Fade the people fading the people who are fading the faders (fading the noobs).

But, Mr. Cox, point taken! One of the few lines on all my charts: The .00 line.

:beer:

[4EverMaAT 10]

I have been trading Eurdollar FX for several years now, and see NO evidence for what has been stated above -- no, i do not know the exact correlation of eurodollar FX futures with said pair on Forex, but if the correlation would be near 100%, this strategy would be pretty useless, even more so, a loosing strategy

 

TR

 

Don't worry about the bogey man stop hunters. I'm amazed at how many superstitions are created around a business that is very straightforward.

 

What some people also miss is that the eurodollar futures has de-facto 1:1200-2000 leverage on its contracts.

After writing this I realized that TR was referring to EURUSD equivilant futures contract. But just to make the point that futures has high leverage too.

[traderunner1 10]

Don't worry about the bogey man stop hunters. I'm amazed at how many superstitions are created around a business that is very straightforward.

 

What some people also miss is that the eurodollar futures has de-facto 1:1200-2000 leverage on its contracts.

After writing this I realized that TR was referring to EURUSD equivilant futures contract. But just to make the point that futures has high leverage too.

 

Indeed it has been circling around 1,3200 a lot of times last days, and i did not see any, repeat ANYof the so called hunting effects.

I just keep relying on my simple volume bars which does not need me to think psychology all the time....

 

TR

[Brookwood 10]

This is all very interesting, but can you provide any evidence to support your claims? If I had done as you suggest above in the USD/JPY spot market at every available opportunity over the last five years, say, then what would have been the outcome?

 

BlueHorseshoe

Yes, Mr. Cox,

for your modest but informative post, please provide Mr. Horseshoe with five years of Time&Sales at zero-lines for his specific instrument. Otherwise how could we possibly trust what you are saying?:rofl:

And Mr. Horseshoe, Mr. Cox did indeed say you could take longs (and their corolary: shorts) into the "zone', so your JPY trades might have turned out ok.Just maybe not using monthly charts.

I must say I feel this is a sort of soft-trolling, this "show us five years (why not ten?Volatility can change...) of data to support your claims or #$%^ off". Why not just look at a 5 minute chart and see what happens at so-called psychological levels for yourself? Let your eyes be the judge before you reflexively nay-say.Mr. Cox might not trade the same way as you do, yet there may be some validity to what he is offering. My ¥.0002.Oh, and Mr. traderunner1, I can't see anywhere in the post about arbitraging the cash market. Perhaps you could point that out. Folks are just blabbering without even trying to understand. What has become of the youth...:doh:

-Brookwood

Edited April 26, 2012 by Brookwood

[traderunner1 10]

[quote name= Mr. traderunner1' date=' I can't see anywhere in the post about arbitraging the cash market. Perhaps you could point that out. Folks are just blabbering without even trying to understand. What has become of the youth...:doh:

-Brookwood[/quote]

 

Don't know what you mean with arbitraging the cash market. I only know i am making a more then decent living over the last 6 years just simply trading with volume bars on the ED FX futures market--- no news, no nothing , very very simple system.

 

cheers

 

 

 

TR

[McKeen 10]

I analyzed this technique a few years ago just after I had learned simple coding.

 

Unfortunately the very bright idea has absolutely zero edge in practice.

 

Trust me when I say I tried thousands of variations of this theory (automated) and there is simply nothing to be exploited.

 

/ McKeen

Edited May 3, 2012 by McKeen
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