Any competent trader in the Forex market during the trading process limits the possible losses by placing safety orders. More often, such an order is simply called a “stop-loss,” by analogy with the English name of such an order. It automatically closes a position upon reaching a certain level. But, the strangest thing is, after the stop loss is triggered, the price reverses and moves in the same direction. It seems that the market or broker intentionally works against the trader. The reason for this phenomenon is often not understood not only by beginners but also by more or less-experienced traders. Enough to read reviews about Alpariand other brokers, where they are unfairly accused of triggering stops. Does the market see where the orders are, moves there, and turns around after they are executed? In fact, there are objective reasons for such situations, and there are several ways to deal with it.
HOW AND WHY IS A FRAUDULENT MOVEMENT TAKING PLACE?
Typically, a trader takes a position based on indicators, signals from trading systems or candlestick patterns. In principle, it doesn’t matter. The main thing is that the price moves in the direction chosen by the trader and where the stop loss is set. In the set of rules of a trading system, the level of estimated losses is always predefined. In most cases, it is recommended to set a stop order for the nearest local extremum. For example, after the appearance of the “Bullish Absorption” candlestick model on the chart, a buy position is opened, and the stop loss is set below the minimum of the previous candlestick. It seems that the position is open correctly, but the price unexpectedly falls and the stop order is executed. After that, the price movement returns to the previous direction. Many traders observe this phenomenon. Especially in recent years, you can see cheating movements almost daily. For example, Euro-dollar at the opening of the European session begins to grow but then drops sharply below the level of opening. Then growth resumes.
The reason for these movements is that market prices depend on the behavior of large players such as banks, hedge funds, and various institutional investors. Opening large positions requires sufficient liquidity, that is, corresponding volumes. Such volumes can not always be obtained at a bargain price, so the price will rise if there is strong demand. Therefore, large players do not buy on rising prices. As a result, the arisen movement fades and the price, not supported by demand, falls. And the stop loss set for purchases is precisely the sell order. You can also add sell-stop orders placed below the local minimum.
All this liquidity is absorbed by the demand of large players, and the price begins to rise again. When you look at forex quotes, you can see that the price fluctuates for a while before a reversal. Large market participants do not even need to know exactly where the stop loss is. Most private traders do roughly the same thing, guided by widespread systems and standard rules for setting a stop loss.
HOW AND WHERE TO SET A STOP LOSS?
The specific stop-loss sizes depend on the trading style and working timeframe, but there are general concepts that are used by almost all traders. Stop-losses are set in zones of local minimums and maximums, near support and resistance levels, above or below ground levels, beyond the borders of channels and consolidation ranges. Training courses also provide such recommendations. Beginning traders need to know the rules for setting a stop loss. In the ranking of Forex brokers, there are many companies with good training programs. So, for example, if you look at the description of the Forex Club, then you can find a mention of the International Academy of Trading and Investments. This Academy offers several courses for traders with different levels of experience. We will consider the main methods of behavior when setting and triggering stop loss.
The simplest solution that some traders use is not to set a stop loss at all. But this is suitable only for very experienced traders who feel the behavior of the market and can afford significant drawdowns. But even in this case, a virtual stop is used, that is, the position is closed manually when a predetermined level of losses is reached. More often this practice leads to big losses.
Some traders claim that the broker sees the stops and “hunts” for them. They use scripts and advisors to close orders. In fact, this does not change anything, since it is not brokers who “hunt”, but large players who are looking for clusters of orders.
A compromise is to set a stop loss at a greater distance than recommended by trading systems and training materials. However, with this method, one must be prepared to wait for drawdowns, not to put a stop too far and close positions manually if it is clear that the trend has changed.
You can do the opposite. If you put the stop very close, then it will be more likely to be knocked out. But after that, you can analyze the situation and reopen the position with more accurate entry. But for such work, you need to have a good command of technical analysis methods and understand where the false breakdown is and where the trend is reversing.
All described options are applied in practice, depending on the financial instrument, timeframe, trading style, trader’s personal qualities, and other factors. The main thing is to move away from standard solutions and act on the situation.