Forex Articles

[greencat]

Forex Stop Hunting - What is it?
Scott Percival -



You've probably seen it mentioned in various trading forums. It may have even happened to you a few times. It's enough to make your head explode. What is it? It's called Stop Hunting.

Here's a typical trading situation. You're convinced that the USD/JPY is heading up. You've entered a long position at 123.40 and you've set your stop at 123.05, slightly below an obvious double bottom. You set your initial target at 124.50, giving you more than a 3:1 ratio of reward to risk. Unfortunately, the trade begins to go against you and breaks down through the support. Your stop is hit and you're out of the trade. You're sure glad you had that stop in place! Who knows how far it could drop now that it's broken that support, right?

Wrong. Guess what happens next. You got it...after taking out your stop, the price turns right back around and heads north, just as you originally thought it would. As you watch from the sidelines, the pair moves up past 124.00, then 125.00, and never looks back. Just maddening. You start to think, "If only I had set the stop just a little lower. What lousy luck!" But is this really just a case of bad luck?

Let me relate one of my own recent trading experiences. Based on a statistical trading tool that I use, I went short the AUD/USD at around 0.7530 and placed a stop up at 0.7570 which was above a local top. I was looking for the price to decline to below 0.7300 over the next few weeks. Within a day or so the price spiked up, took out my stop and then moved back down into the consolidation area at around 0.7540. Now, because of this last spike, there were two local highs on the chart near 0.7570. Not to be deterred from my trade, I re-entered my short position in the 0.7530 area, and this time I put my stop at 0.7580, just above the last spike. After all, what were the chances that the price would break through that resistance again? Well as it turned out, that's exactly what happened! The price spiked up and hit my stop again, knocking me out of the trade for a second time. And even more frustrating, as soon as my stop was hit, the price turned right back down again in the direction I had originally anticipated!

Ian Fleming's character, Goldfinger, once said,

"Once is happenstance, twice is coincidence, three times is enemy action." (Play James Bond music here...)

However, I wasn't actually paranoid enough to think that someone was specifically picking off only my stop orders of course. First of all, my trades were so small that no one would bother trying to pick them off, and secondly I was doing these trades in a practice demo account! But I bet I wasn't the only dunderhead that was putting my stops in that obvious position just above the recent highs. There were probably quite a few buy-stop orders in that price area, and it certainly looked to me like someone was gunning for those stops. This hypothetical someone may have been a stop hunter.

So what's a stop hunter and what's all this stuff about picking off stop orders? A stop hunter is a market player that attempts to trigger the stop orders of other traders for their own benefit. They generally have the capability to move the market by a small degree for a short period. The stop hunter may be a FOREX broker's dealing desk which is trading in competition with its customers or it may simply be a large player in the market; a bank, a hedge fund or whatever.

Stop hunters operate best in an environment where most traders believe that the market is about to move in a certain direction. As traders take positions, the inexperienced ones (like me in the trade above) will place their stops at obvious places in order to cut losses if the price moves in the other direction. The stop hunters know where the amateurs are probably placing these stops, so they try to move the market enough to trigger them. This may allow a stop hunter to enter a trade at a good price before the market begins its move in the direction that everyone expects.

For example in my short trade above, there were a lot of indications that the market was headed down. Stop hunters knew that a lot of traders had taken short positions, and had probably positioned their buy-stops up at the 0.7570 area. So why should these savvy stop hunters enter a short position at 0.7530 when so many willing amateurs were willing to buy from them at 0.7570? So they proceeded to push the price up to 0.7570, and when my buy-stop order was triggered up there, guess who I was buying from? Exactly...the stop hunters who were selling to me at a great price (for them). Now I was out of the market, and they had taken over my short position at a price 40 pips above where I entered it. I had a 40 pip loss, while they entered at a price that was 40 pips better than they otherwise could have. Then, when the market headed down as we all expected it would, the stop hunters were laughing all the way to the bank while I was sitting on the sidelines pulling out what little hair I have left!

Note that a situation in which everyone expected the market to move up would work in just the opposite fashion. The amateurs would have their sell-stops at some obvious point below the market, and the stop hunters would push the market down in order to trigger those sell-stop orders. Then the amateurs would be selling out of their long positions in a panic while the stop hunters were buying from them at great prices in expectation of the coming move north.

The type of stop hunting that I've just described is used in situations where most market participants expect the price to move in a certain direction. In this situation, both the savvy stop hunters and the amateurs have the same market opinion; they are not battling each other in a contest of bulls vs. bears. The stop hunters are just trying to take over the positions of the amateurs at a good price.

There is another situation in which stop hunters try to move the market toward a group of stops in the hope that triggering the stops will push the market further in the same direction, thus triggering even more stops and so forth in a snowball effect. This is how some short term panics and rallies are created. In this case, the stop hunters have taken positions in the opposite direction from the amateurs, and are simply trying to trigger the stops to get the amateurs to panic and keep the ball rolling in that direction. My guess is that this tactic is more prevalent in less liquid markets like stocks and futures as opposed to FOREX.

[Dinamo]

Great read. They have been known for doing this for quite a while. It is really easy money for them. I was taught to set my stop loss usually about 10% lower than where I would usually set it. For instance, if I would normally find the technical or psychological support at a distance of let's say 50 pips from my entry, I would set the stop loss 55 pips from my entry point. Works much better than before, still far from perfect though.

[Ciao]

GC Very interesting … can I posted on an Italian forum?

In my inexperienced use of SL I got caught in that net….
I soon learn to change the strategy ;)

[greencat]

Originally Posted by Ciao

GC Very interesting … can I posted on an Italian forum?

In my inexperienced use of SL I got caught in that net….
I soon learn to change the strategy ;)

Sure no problem.
It has happened to me a few times. I now like to put the stop right where is common pratice and watch it. I will cancel the stop right before it hits just to see if someone is stop hunting. The charts have to be in my favor for me to change the stop. But I have experienced the moment I cancelled the stop it moved back in the direction I was hoping for.

[Dinamo]

this week I had my stop loss triggered two times, on etime by the bid the other by the ask, without the actual price really hitting my s/l. Of course I was pissed. Especially because I have lost about 120 pips this way with nzd/usd. It is all a learning experience but spikes like the ones I encountered are totally BS imo.

[greencat]

What is Forex?
FOREX (Foreign Exchange) is an international financial market where currencies are bought and sold freely. Many of the major currencies have been traded freely from the early 1970s but back then forex was only open to the very big players. With the invention of the internet, it has opened the doors to a much wider spectrum of traders. You can even start trading with as little as $100.

It is the most liquid financial market in the world with in excess of one trillion dollars traded daily, this is far greater than any other financial market. One can not be certain of the exact numbers as unlike futures, stocks etc there is no centralized exchange. The market is traded from midnight on Monday (GMT) to midnight on Friday.

The Forex market has a very wide spectrum of traders from the very small to the very large including Central banks, banks, corporations, hedge funds, portfolio managers and small speculators. The forex market is often used by big business' to hedge their currency risks on theirs imports and exports

Risk Management
by Peter Marsden
Risk management is a term often used with FX trading. It is perhaps one of the biggest factors that separates the winning traders from the losers. Experienced traders know they must use extreme discipline at all times when trading if they have any chance of succeeding. The inexperienced trader may find this part of their trading the single most difficult thing to master. With FX trading it is always essential to have the long term picture in mind. One day here or there really has very little impact on the big picture. It is important that the amount risked on each trade reflects this view. For example there is no point risking 1% of your account per trade for 3 months, then risking 20% on one trade because it is a “sure thing”. This kind of behavior is little more than gambling and that is not we want. We want the long term odds in our favour. It also potentially undoes all the hard work you did for those 3 months.

Let's say we have a $10,000 account balance and have developed an intraday strategy and would like to risk 1% of our account balance on each trade:

Now let's say our strategy is telling us to buy GBP/USD and there is major support 20 pips below price and we want to risk 30 pips.

1% of our account is $100. So we need to select the position size with this in mind.

If we divide the amount we would be prepared to risk with the number of pips we are prepared to risk, it will tell us the price per pip we wish to trade. Let's do this simple math

$100 / 33 = $3.33.

The pip values of one minilot on GBP/USD are one $1 per pip. So our position size would need to be 3.3 minilots. Many brokers do not allow us to trade fractional minilots so we will round it down to $3. So our position size will be 3 minilots for this trade.

So the worst that can happen on this trade would be an approximately 1% loss. As no trader can win 100% of the time, and will inevitably go through a bad run at some point, it is essential to ensure when this does occur, it is a minor bump along the road and not a complete disaster to your account. Remember, always think of the big picture.

Let's take a quick look at what would happen if you used too much risk on your trades and hit a bad run. Most strategies do at some point. Say you were trading with 1% risk per trade your account was -10% at the end of the month, you would need around 11% to get back to break even. If however you had exposed yourself to a much higher risk, say 5% per trade and were -50% at the end of the month, you would need to make 100% just to get back to breakeven, this would be disastrous. Compounding can work nicely for you, but it can also work against you.

It can be very difficult at first for new traders to consistently use good risk management as it's easy to let your emotion dictate your trading. These are some of the emotions and thoughts I experienced at first:

“Nevermind, This trade lost, I will just trade will double next time to make it back”
“I'm carrying a large floating loss, the market will move back in my favour”
“I'm bored I don't have a signal but I want to be in the market and I price will continue to move up”
“A hedge fund manager on bloomberg expects the pound to appreciate so I will use high leverage and go long”

and many more..
These kind of emotions are very common amongst new traders and they really are an almost certain way to be a losing trader. It with this in mind that it is very important that new traders trade on a demo account for many months prior to trading live. It is true, that the vast majority of new traders lose all their money in a very short time frame and the vast majority of traders end up losing money in the long term, even many of the big institutional traders. With this in mind it is essential that you are fully knowledgeable and prepared for trading and have got over the emotions that come it.

[greencat]

Forex Scalping
Forex Scalping appears to be coming increasingly popular amongst retail traders. This type of trading usually involves opening a very short term position on a currency pair, often only lasting a few seconds or minutes. Scalpers will often make a very large number of trades per day, in excess of 50 is not uncommon. The goal of scalping the forex market is to earn pips on very small moves. The profits on these small moves can be compounded to generate a nice return on your money if a good consistent strategy is used.

Forex Scalping and Brokers
Choosing a broker is very important when scalping. As typically a scalper makes a large number of trades, this will inevitably mean paying large number of spreads to the broker, so it is very important to choose a broker with very low spreads, so they don't eat into your profits too much. Due to the fact that scalping involves so many trades, the scalper needs to win well in excess of half their trades to break even (assuming a 1:1 risk/reward ratio), the wider the spreads the higher the win ratio will need to be. Many brokers are not keen on scalpers at all and will actually close your account if you start to make a consistent profit with scalping. ECN brokers tend to be better for scalpers as they do not trade against their clients. Spreads are often lower with ECN brokers too, but they usually charge commissions.

There are many different strategies employed by scalpers. A common one that I have tried with good results is to put an order at major support or resistance points and try and scalp a few pips from the “bounce”. Other traders like to scalp during the news to put up a few pips. Like other forms of forex trading, scalping requires discipline and patience until the right low risk setup arises.

[greencat]

Fri Feb 08 14:02:11 2008
EST


By Dan Molinski
Of DOW JONES NEWSWIRES


NEW YORK (Dow Jones)--The dollar, coming off one of its best weeks against
the euro in months, should consolidate those gains next week, though it may
retreat some if U.S. data come in weak and refuel fears of a recession.

The euro dropped 3% against the dollar this week as currency investors
shifted their focus away from the U.S. economic problems and began looking at
the euro zone, whose central bankers began warning about downside risks to the
economy.

Currency investors will continue to monitor the euro zone situation in the
coming week, looking for any comments from European Central Bank officials that
might indicate the ECB will soon start cutting interest rates the way the
Federal Reserve has been doing for months.

"ECB commentary will be important as bank members seem to be starting to
converge," said Geoffrey Yu, a Zurich-based currency strategist at UBS.
"They're talking less about inflation and price pressures, and more about risks
to the economy."

Expectations of lower interest rates from the ECB would likely hurt the euro,
and thus help the dollar, as some investors would sell the single currency and
look instead for higher-yielding currencies.

The dollar rally has also reduced any worries that finance leaders from the
Group of Seven leading industrialized nations, who are meeting this weekend in
Japan, may lodge any official complaints about the greenback's general weakness
during previous months.

Against this backdrop, analysts say the euro is likely to trade against the
dollar in a range between $1.4300 and $1.4600 in the coming week, while the
dollar could move between Y105.00 and Y108.00.

Friday afternoon, the euro was at $1.4526, up from $1.4474 late Thursday,
while the dollar was at Y107.32, down from Y107.50. The euro was at Y155.88, up
from Y155.55 late Thursday. The U.K. pound was at $1.9482, up from $1.9427,
according to EBS, while the dollar was at CHF1.1022, down from CHF1.1043 late
Thursday.

But analysts also warn investors not to get so sidetracked by the dollar's
recent rally and economic problems in Europe that they forget the U.S. economy
continues to teeter on the edge of a recession that could last for a while and
weigh heavily on the dollar.

Next Wednesday's report on January U.S. retail sales may be a wake-up call
for investors who might be thinking the dollar will keep rallying. Consumer
spending is the biggest component of U.S. gross domestic product, so if
January's number shows a contraction, as December's number did, it might signal
that growth rates are turning negative.

"Retail sales will draw much attention," said Hidetoshi Yanagihara, currency
strategist at Mizuho Corporate Bank in New York. "More than almost any other
data, markets want to know how consumer spending is holding up."

Yanagihara said a weak retail sales report could push the dollar down against
the yen, perhaps toward its two-and-a-half year low near Y105.0. But he added
that the dollar's performance against the yen is more likely to be guided by
the performance of U.S. stock markets than by the data itself.

Short-term currency investors also may use the retail sales report as an
excuse to sell the dollar to book profits on long-dollar positions they took
out in recent days to bet on the dollar's strength.

"There very well may be some short-term profit taking next week, especially
after (this past week's) sharp move," said UBS's Yu. "But it seems market
opinion is shifting toward the idea that the euro is not going to be able to
rally above $1.50."

The dollar's recent resilience to weak U.S. data suggests markets may have
fully priced in expectations of a struggling U.S. economy. Therefore,
dollar-selling on the back of disappointing U.S. data may be limited, said
analysts.

Because the data are from January, many investors might consider it as
somewhat dated. Markets instead want to see how the economy will do moving
forward, on the heels of the Federal Reserve's big rate cuts in January and the
government's just-passed economic-stimulus package.

With the euro zone's economy grabbing more attention than normal, analysts
said currency investors should factor in economic reports from the region into
their trading strategies.

On Thursday, the euro zone and individual European nations will be reporting
fourth-quarter economic growth statistics.

In the U.S., data apart from retail sales that will draw attention include
December's trade balance, due Thursday, and a report from the Treasury
Department on foreign capital flows, due Friday.

Also Friday, U.S. industrial production and import price data for January
will be released.

[greencat]

Forex Market Commentary
By Kathy Lien

The dollar has weakened this past week, but the question on everyone’s mind is how bad is the US economy really doing? Hopefully next week’s heavy data calendar and testimony by Federal Reserve Chairman Ben Bernanke will shed more light on the state of the US economy and monetary policy. With the exception of producer prices, we expect more dollar bearish news and would actually be surprised if Bernanke had anything positive to say about the US economy. The Federal Reserve has cut interest rates by 225bp since August and it will be interesting to see if this has helped existing or new home sales in the month of January. According to the NAHB housing market index, bottom fishers are slowly beginning to sniff out the inventory, but just because they are sniffing do not mean that they are buying. Durable goods, fourth quarter GDP, personal income, personal spending and the Chicago PMI reports are also expected to be released, which means that a volatile week is in store for the currency market. There is a good chance that another round of weak US economic data could drive the US dollar to a record low against the Euro. We continue to believe that the next 2 months of retail sales and non-farm payrolls data will be particularly weak because the last time that we have seen service sector ISM fall to the levels that it did back in January was in 2001 and at that time, non-farm payrolls dropped 300k. In some ways, the latest crisis to the US economy is worse than 2001 which means that the 17k job loss that was reported by the Labor Department in January could pale in comparison to the losses that we could see in February and March. The same can be said for retail sales. Food prices have been on a tear, forcing many consumers to count their pennies at the supermarket. Milk prices alone have increased 15 percent since the beginning of last year. However amidst all of the bad news, there is some good. Many traders are expecting a V shaped recovery in the US economy in the second half of the year. According to the profit forecasts for the S&P 500, a 19 percent increase in earnings is expected in Q3. Traders have also piled into steepener trades in the bond markets which mean that they expect yields to rise again a few months forward. This plays into our view that the US dollar will recover in the second half of the year.

New Zealand Dollar Nears 22 Year High, Australian Dollar Trails Behind, Canadian Dollar Behind the Curve

Despite the lack of any economic data, the New Zealand dollar rallied over 1 percent against the US dollar, leaving it within a few pips of its 22 year high. With 8.25 percent interest rates, many people argued that it was just a matter of time before we saw a strong breakout in the New Zealand dollar. The power of today’s move suggests that a new multi-decade high will be made in the currency early next week even though the only piece of market moving data from New Zealand is not due for release until Thursday. The Australian dollar continued to gain strength, but the rally could lose steam as the calendar next week is completely devoid of any Australian economic data. The Canadian dollar on the other hand weakened marginally against the US dollar after a disappointing retail sales report. Like New Zealand, there are no Canadian releases until the end of next week.

Euro: Still Headed for All Time Highs

The EUR/USD is aiming for its record high and today’s Eurozone economic data is certainly helping to fuel the rally. Despite the slowdown in the global economy, the advance release of Eurozone PMI indicates that the economy is still holding strong, which may lend a bullish tone to next week’s economic data. Traders will be looking to the German IFO report, retail sales, unemployment and the Euro-zone retail PMI and CPI figures for further clues to when the bank will begin to cut interest rates. Comments from ECB member Gonzalez Paramo today suggests that any rate cut from the ECB will not come until the second half of the year. Like some of the other members of the central bank, Gonzalez Paramo believes that “all in all the fundamentals of the euro zone economy remain sound.” The futures market is still pricing in 50 to 75bp of easing by the ECB in 2008, but the price action in the Euro has yet to reflect that sentiment.

British Pound: Can the Gains be Sustained?

After yesterday’s strong retail sales number and blockbuster recovery in the British pound, the currency continued to see a broad based recovery. The outlook for the British pound has become extremely uncertain with a hawkish Quarterly Inflation report, strong retail sales and an upside surprise in employment conflicting with the dovish minutes from the most recent Bank of England meeting. That is why next week’s UK GDP, housing numbers and GfK consumer confidence will be very important because they provide more information on the recent health of the UK economy.

Carry Trade Recovery Limited by Continued Volatility in Equities

News that a bank bailout plan for bond insurer AMBAC will be announced Monday or Tuesday triggered a 200 point reversal in the Dow. Unsurprisingly, the move had only a limited impact on carry trades. Although the correlation between carry and equities continues to fade, the one thing that remains unchanged is the fact that the volatility in the equity market is a big reason why carry trades have been unable to muster a sustainable rally. This relationship should be the main focus of Yen traders. Meanwhile there will be a lot of Japanese economic data due for release in the week ahead including retail trade, industrial production CPI and overall household spending. These reports should only have a limited impact on the Japanese Yen.

[greencat]

CANADIAN INTEREST RATE CUT; HOW DO I BENEFIT FROM IT: DOUBLE APPROACH?

The world Economics expects the Bank of Canada to cut rates by 50bps on Tuesday from 3.50% to 3.00%, this seems to be the lowest rate cut since the last 3years.What is the major reason behind this? Some one may ask. The answer is obvious: Spillover from US bad economy (recession, inflation, credit, etc,) Because of the strong business
Relationship between the two countries, any major economic crises in the US affects the Canadian economy.

HOW CAN IT BE TRADED?

1. PRE-RATE CUT STRATEGY?


Look for the currencies that have strong fundamental at least within the last 24 hours before the announcement, and trade it against the Canadian dollars, which the FX market expects to be weak because of the big interest rate cut. This currency could be a base or a counter; the key issue here is that any of such currency should be stronger than the Canadian dollar within the time in question. Or else, the chosen pairs will be ranging because of equal strength. Looking into my spreadsheet I can find the likes of AUD, NZD, EUR, GBP, and USD.

Look for good hips in any of these currency pairs (AUD/CAD, NZD/CAD, EUR/CAD, and USD/CAD) and BUY. If Japanese Yen is strong enough I will also recommend a SELL on CAD/JPY. The 'positive’ out come of Canadian 'Foreign Securities Purchases'(by 1.30pm GMT) may give you a better entry. Ensure that you close all open positions (or lock in some profit) few hours before the rate cut on Tuesday.

2. POST-RATE CUT STRATEGY

Bank of Canada may decide to cut interest rate by .25%. If that happens the Canadian dollar will be strengthen against most currencies. As a result, I will expect the reader to BUY Canadian dollar. If they cut the rate by .50%, as expected. The Canadian dollar will be weak across the board. In this case, I will expect the reader to SELL Canadian dollar. The duration of the rally, will depend the currency pair that you choose to trade and/or the strength of such individual currency in question. If there was a .25% rate cut, the impact will be much. In that case, it may rally for at least two days. If they cut by .50% as expected, the impact may not be as much as the first variation. Once the rate cut is announced, do not jump in. Wait for 15 minutes, before you take a position.