Your Stop-Losses Feed The Accounts of Other Traders

Novice Forex trader asks: “Why does the market always take my Stop-Losses?”

What if I told you that placing of stop losses is necessary for bigger traders to trade at the market, how would you feel? Would you believe it?

One of the first things you hear in Forex trading is that without placing stop losses, you will only lose your money while not lose all your deposit.

Our protective stops are vital to managing our risk, and even one your position that was opened without a stop-order can lead to the crash of your trading account. I don’t think this statement can cause a lot of doubt. But how can this information help us to compete with other novice traders?

Stop-Losses in trading

The uniqueness of stop orders is that they, being the pending orders, are waiting for execution at a predetermined price. But they are executed at the MARKET price. Market orders are executed at the best available price and prone to slippage, especially in inactive markets and in conditions of severe volatility.

When triggered, an important function of stop orders is that they add momentum to the market and at the same time, use market liquidity.

Why is it so important in trading?

Depending on how you are trading, further information can help you:

1. Prevent slippage;
2. Trade on one side with bigger players;
3. Get quick profit;
4. Collect money from novice traders.

This picture below shows the common placement of stop orders. What did every trader hear about?

«Opening a position, place a protective stop just below the level of minimum/maximum of price».

The reason is that this level is identified as an important support level.

What else can be placed in the area of support? Limit order to buy of the traders, who set the support zone and wait for the time to open positions during repeated testing of the level.

Is there a large number of stops under each level? It depends on the timeframe and on how quickly the price leaves the area at the time of buying.

• In general, fluctuations in prices on higher timeframes will contain more stops than on the lower timeframes. The pivot point can longer remain untouched on the hourly chart, and therefore, it can be seen by more people than on the 5-minute chart.
• Faster price movement from the support zone may explain the fact that the direction of the price movement is supported by the expressed interest of the traders, and, consequently, there may be a larger number of market participants, larger positions and, ultimately, the greater number of stops.

When the price reaches this level, traders are still interested in long positions, but this time, the price doesn’t bounce from this level, as you would expect. It does not break the level, does not show lower Lows, but shows lower Highs.

If you were interested in opening a long position right now, what would you do? The average trader playing on the “bounce” of prices from the level of support would open a long position, placing the stop just below the support level. If you had a limit order that hasn’t been executed, I wouldn’t hurry with the order. If you wait for some time to enter to buy, it would be a good idea not to enter the market.

1. Candles/bars show lower highs;
2. The price is not growing as fast as you would expect;
3. You know that just below the support area there are plenty of stop orders.

What happens next? Price moves down under the pressure and breaks the stops of the traders holding long positions, and, as we remember, when stops of the customers triggers, these stops are  market orders to sell, and they force the price to move further down.

The traders, waiting for the opening of short positions, open them because the price breaks the support level, but then the market “eats” them, because the price goes higher.

What is important else?

Those traders, who originally placed long positions and have been rejected from the market by broken stops, help to push the price up. Now the chart looks like this:

New stops are placed below the new level; we have — “Groundhog Day”.  And all that have been played now will be played again and again… just on different price levels.

Use this information for your trading

I hope you understood the concepts that are outlined in this post. It can be used in different variations, for example, to get a quick profit when the price beats out the stop losses of other players who were not as smart as you are.

I will not describe any specific trading strategy, because:

• Understanding of the concept is the most important
• Application of your understanding will allow you to develop your own strategy

You should find some valuable ways to use this information. For those of you whose stop-loss are “eaten” by the market usually, this information might be a revelation.

Always think about where the stop losses of other players are placed and remember that the market will want to pick them up. After all, everyone wants to eat 🙂

Take care, Michael

ForexTraderPortal.com