Why does the price turn around after my stop loss?

Hello, fellow forex traders!

Today, we will discuss one rhetorical question, which often arises both for beginners and for quite experienced traders. This question sounds like this: “Why, as soon as my stop loss triggered, the price reverses?”

Why is this happening, does the market see where you place your orders, and why it knocks them out, immediately turning in the original direction? Let’s try to figure out what is the prerequisite for this situation, where most of the market participants put the stop-loss, what to do with it.

Main Idea

Let’s say you found the “Outside Bar” model on the chart and concluded that the price would go up in the future. It does not matter whether the signal indicator or the trading system showed. The question is, where would you put the stop-loss here? Most likely, either under candles or near the last local minimum.

It would seem that everything is fine, but then the price triggered your stop-loss, and goes up, as expected. I think you can bring many similar examples from your own practice or after watching other traders.

Why is this happening?

The fact is that on the market, in addition to other traders, like us, there are also major players: hedge funds, banks, various institutional investors. They open large positions that a sufficient level of liquidity is needed for.

If you attempt to open a similar position in the middle of the trend, a large volume can greatly shift the price towards the position, but after that, the price will roll back with a high probability, leaving the trader at a disadvantage.

Imagine: if you come to the market to buy potatoes, but instead of 1 kilogram, you buy the whole wagon. It would seem, you should receive a more favorable price, as a wholesale buyer, and actually, the more favorable price will be received by the one who has come for 1 kg.

Therefore, large players have to search for places with high liquidity for sale, so that it is profitable to purchase and vice versa. Actually, your stop-loss for the purchase position is nothing like a sell order. Accordingly, it is advantageous for a large player to take exactly this liquidity in the form of stop-losses and pending sell stop orders, and thus gain an appropriate position, not much shifting the market price.

You probably wonder how such a big player can be interested in such small positions. But, the fact is that about 95% of traders place orders in approximately the same places. Accordingly, since people think the same way, big players do not need to see all the insider information about exactly where your stop-loss is, it is obvious where it is. After the liquidity has been absorbed, the market goes in its direction, but without you.

Most market participants put a stop-loss in one of the listed places:

• Local lows/highs;
• Support/resistance levels;
• Round levels;
• Beyond the boundaries of channels, rectangles and other consolidation patterns.

A natural question, what do you do with this information and how to live further?

Where to put a stop-loss?

1) The first thing that comes to mind – not to put the stop loss at all, no stop - no problem. However, this practice is not suitable for everyone. If you are recently in the market, working without a stop-loss, that is, keeping it in mind or using a virtual one without putting it directly into the market, is dangerous, and this practice often leads to big losses or loss of the entire deposit.

2) Some use different technical tricks, using the so-called virtual stop-loss. That is, the order will close, but it will be closed by the expert adviser, not the automatic market order. But, in fact, it does not matter whether the stop is in the market or not - the behavior of the major players will not change from this.

3) The next logical decision is to put a stop-loss with a large margin (at a further distance). This decision is not bad. The margin, however, should not be too big, otherwise, you just increase the risks in vain. This option does not help in all cases, but on the whole, this is a good compromise.

4) The reverse solution is a very short stop. If it is triggered, no need to worry much and then enter the market again. At the same time, if the stop is still triggered, you need to understand why this happened, and only after analyzing the situation enter the second time.

For example, after analyzing the situation on an example, it becomes clear that the stop was most likely triggered because of a large player who had eaten liquidity for sale, and after the corrective movement, one should expect further growth. In this case, when the decision is based not on emotions, but on rational calculation, you can enter the market repeatedly.

5) In the same way, you can enter after a false breakdown. If you have received a confirmation of a false breakdown (information is confirmed), then it is entirely possible to use a similar situation for your own benefit. That is, to enter the market when you knocked out the stops of other participants.

6) To calculate the stop-loss size, you can use not only the chart itself but also other auxiliary tools, for example, the ATR indicator. ATR readings are usually multiplied by some factor, for example, 2 or 3. In this case, we have a daily chart and ATR values are large enough, so the multiplier 2 will be enough. The indicator shows 112 points, then stop-loss is set at a distance of 224 points (112 * 2) from the entry point. In general, as the tests show, this is one of the correct ways to set a stop-loss.

Conclusion

You can freely apply any of the solutions listed. Perhaps, you will find some solution to this problem on your own - someone uses grid strategy, someone uses hedging. But, this already applies to more professional tactics, and if you are a beginner, I do not advise you to try them now. The most optimal solution is the Average True Range indicator (ATR). This is the correct option, helping to avoid frequent situations of triggering a stop with a subsequent price reversal. The main thing is to try not to think like everyone else, remember the big players, their methods of opening positions and everything will be fine!

Regards, Michael

ForexTraderPortal.com