Just like leprechauns and Big Foot, Stop-Loss hunting is the stuff of fairy tales and conspiracy theories with as many people believing it exists while many others think it is a pile of bull. Is your forex broker deliberately putting your account into losses? Are you being swindled? Are big investors tampering with the market to ensure small traders never make a dime trading forex? Let’s find out.
A stop-loss is a money management instrument used by a forex trader to preserve his investment by ensuring that only a small fraction of his account goes into loss should a trade not go in his favour.
If you are trading, say $1000, you might set a stop-loss so that the biggest loss you can incur should the market go against you on a particular trade is $100. Immediately your account’s loss hits $100, the stop loss is triggered and you are removed from the market. This is considered an account preservation measure because in absence of such a stop-loss, the market might continue going against you until all of your $1000 is gone.
How big (or small) you decide to set your stop-loss will depend on a multitude of variables. It might be a fixed value, eg $100. It might be a ratio, eg only 2% of your account should be at risk at any time. It might be a point, eg a Support level on your chart based on your trading strategy. Your own money management rules will dictate the size of your stop-loss, or if you should use one at all.
So, what is stop-loss hunting?
Basically, if you are trading with a broker who is a Market Maker, they make money every time you lose money. In theory, this means that if you set your stop-loss at $100 and your broker introduces an ‘artificial’ spike that triggers your stop-loss, the $100 you lose will be gained by your broker. You start seeing the magnitude of the problem when, say, 10,000 traders all put their stop-loss at an obvious point, eg region of resistance, and each one is willing to lose $100. That is an easy 1 million dollars that your broker can make by simply feeding a spike that will knock all of you traders out of the market.
Does stop-loss hunting occur? Yes and No.
The internet is chock-full of screenshots and evidence from traders of spikes that ONLY occurred on the platform of one broker while it is clearly not visible on the platforms of other brokers (a clear sign of mischief). Sometimes, when you are being targeted as an individual, it is as ridiculous as you taking the same trade on your Demo and Real account, and the Demo trade makes profit while the Real trade gets stopped out. Forex brokers on the other hand swear on their mother’s grave (unless, of course, she is not dead) that they would never engage in such malpractices and that the regulatory authorities (all curiously based in Cyprus) would crack the whip should they dare to tamper with client market information.
Where does that leave us as forex traders? Well, Just like with leprechauns and Big Foot, you will have to chose what you want to believe! You do have a few options to guard yourself against stop-loss hunting – assuming that you have chosen to believe that it exists – Including;
- Opt for an ECN broker instead of a Market Maker. You will pay commissions, but no monkey business behind the curtains.
- Call them out. If you see a spike on one of your MT4 charts that is not on any other Brokers MT4, take screenshots, post them on your blog, post them on all your social media platforms, make a youtube video and express yourself, mail the same to the broker and look for all sites available for complaining against rogue brokers. Even if it does not cause them to be summoned by the regulators, they will eventually close shop due to the mass exodus of traders and investors. No broker wants bad press.
- Don’t place your stop loss at obvious points where it can be hunted (like bang onto a round number resistance), move it just a few pips above or below the line because spikes are like snipers – they rarely go beyond their targets.
- In short, Be vigilant!
PS: Stop loss hunting was the subject of one of my Free Forex Classes in the Nairobi CBD. To see if there is a Free Forex Class around the corner, click HERE. To book for a full forex class, click HERE.
Thank you, and I wish you all Happy and Prosperous trading.