In this article, we look at a stop run which took place on the GBPCAD. It demonstrates how it occurs and how many traders get trapped on the wrong side of the move. Remember the whole reason why this happens is because Smart Money is moving the markets and wishes to do this as unpredictably as possible….

Back to The Essence – How Forex works

If we go back to the essence of what moves the forex markets we understand that it’s the big players – the big banks, the institutional traders, the hedge funds which in a nutshell are referred to as Smart Money. They initiate the moves and terminate them when they have achieved their objectives. Logic would then say that is a trader is looking to make money in the markets then he/she will need to find a way of tracking what these big boys are doing and follow them. If one is able to do this successfully then he/she will have a greater chance of being profitable. The question that then arises is “how do you track what smart money is doing?” How do you recognize when they turn up and how can you ensure that you are not trading in the opposite direction?

A Question of Perspective

The first thing you need to realize is that smart money does the opposite of what retail traders do. The large institutions look at the market from the perspective of how best to match their orders – so if they are looking to execute a large batch of buy orders then they are looking for the lowest price that they can buy at which means generally they will be buying as price is moving down and everyone else is selling. This will often mean that traders will be wrong footed and find themselves on the wrong side of a major move. Has this ever happened to you? You were short on a trade and price was moving nicely in your favor so you leave your trade running, only to return later to find out that you have been stopped. To make matter worse you check you screens later only to find out that price has since moved in your original direction! Frustrating isn’t it?

A Close Examination of your stops

The above scenario has played out on many retail traders and leads to frustration, confusion, and loss of confidence. You have been taught “trade with the trend” but you find the trend keeps changing, or you are able to get the direction of where price is likely to move right most of the time but yet keep getting stopped out only to sit and watch the price go in that direction. What do you do? Do you widen your stop loss, do you not use a stop loss? What’s the answer? The answer lies in the problem – your stop loss!

Every time you place a stop loss in the market, market makers and smart money is able to see it – and there lies the problem. The moment your stop loss can be seen then this represents another order that smart money can use to fulfill their trading plan. A stop loss is nothing more than an order in the market. So if you’re short the market then your stop loss will be a buy order which will be located at the price level you want that order executed on. If you’re long the market then the stop loss will be a sell order which will be located at the price level that you want it executed at to get you out of a trade.

Stop Loss Placement

The majority of traders place their stop losses in more or less the same position. For example, you might have been taught place your stop loss below a swing low or support level if going long and above a swing high or a resistance level if going short. Although these are logical places to put a stop loss, the problem is that if everyone else does the same thing then this leads to a stack of orders being built up. Smart money can then hunt these stops by forcing the price to move towards them and trigger those orders before reversing the direction afterward. The below chart shows this unfolding:

GBPCAD Stop Hunts: Chart Example:

 

Let’s break down the chart:

Point 1:

how Forex works, bank manipulation example

how Forex works, bank manipulation example

This is the first stop run on the chart and we can see that to the left of it was a swing low. That swing low would have contained many orders split into stop loss orders for people who were long the market and placed their stop loss there as well as people who would have come in too short the market on price breaking below the swing low point. Either way, the orders would all be sell orders. Price then goes a few pips below that swing low – enough to trigger the waiting orders before reversing directions and heading up aggressively. Was that a coincidence or was it deliberate? There are no coincidences in the market, it was actually smart money forcing prices down to trigger the stops before taking price higher which would have been their original intention.

Point 2:

At point 2, having risen for almost 200 pips in a straight line without taking a breather, price stabilizes and starts to consolidate characterized by the blue shaded area. At this point traders who were long will be looking for where to tighten their stop losses to and most will put them just below the low of the consolidation. As price makes a small push up some traders will be enticed to enter long on the expectation of the recent uptrend continuing further. Price reverses almost immediately after having enticed traders in and starts heading down forcing the stop loss orders placed below the consolidation to be hit. This causes the price to go down further and we can see several red bars in a row denoting strong selling. This means Smart Money has stepped in to do the opposite of what everyone thought once again!

Point 3:

We form a swing long just before point 3 and it is at this point that any remaining traders who might have been long the market from the earlier move from point 1 to point 2 would place their stops. Remember this that a swing low is formed when there is strong buying coming in to push the price back up so naturally there will be stop losses and sell orders in general below each swing point. In the case of point 3, we see that price at some point pushed below the swing point to the left. This would have triggered the sell orders from the stop losses for any trader who was still long but decided to give it a generous stop-loss, and from any new traders who were selling or price breaking the swing low on the expectation of price heading down lower. Either way, Smart Money has triggered both orders and then moved price up in the opposite direction towards point 4.

how Forex works, bank manipulation example

how Forex works, bank manipulation example

 

Point 4:

Notice the move from point 3 to point 4 was short and there is a good reason for it. The large institutions look for major moves in the forex market which will often last a few days at a time and make a few hundred pips in the process. Due to the size of their trading positions, it is pointless for them to move and manipulate the market for just 30 pips or so. Hence one of the tactics they employ is called the “shake out”. This isn’t a reference to a 1960’s pop dance but rather the terms give to when Smart Money attempts to shake off any traders following what they are doing so that they can execute their trade plan uninterrupted.

The swing high to the left of point 4 is where orders would have been stacked from any traders who were short the market at point 3. Also, some traders might wish to be long the market on price breaking above that swing high. Both of these will place buy orders and what happens? Smart Money push price up to trigger those collected orders and effectively hunting the stops and shaking out all the traders before reversing price and heading down. Notice how aggressive and decisive the move which comes out of point 4 is – 4 seller bars in a row before we get a pull back.

Point 5:

From point 4 to point 5, the price has moved 250 pips which is the kind of distance that Smart Money needs but they did this using some clever price manipulation. At this point, they have several options depending on their business plan. They can either continue pushing the price down if they have not hit their profit target yet. Alternatively, if they have hit their target then they will unwind their positions covertly so that other traders don’t pick up what they’re doing hence why we have a range bound market from point 5 to 6. Notice the swing low prior to point 5? This would have been the reference point for where new traders would come in. Traders having seen the trend being down and maybe having missed out on shorting would now see the next opportunity to enter short being when price breaks below the swing low. And this is what happens at point 5 – new sell orders enter the market with stop losses typically placed above the last swing high.

how Forex works, bank manipulation example

how Forex works, bank manipulation example

Point 6:

After traders have been enticed into the forex market at point 5, price moves sideways until it heads down again at point 6. Now here is where the most interesting Smart Money manipulation takes place. When traders see price heading down below point 5 naturally many will jump into a trade and sell on the assumption that price will continue down since the trend leading up to this point has been down. Notice how the candle at point 6 has a very long tail – this gives a strong indication that a stop run has just taken place and Smart Money has effectively triggered all the sell orders that were present in that market before reversing price up.

On reversing price up notice that it goes only as high as the previous swing high point. This is deliberate as Smart Money realizes there is a very good chance that there are many stop loss orders stacked at this point for the traders who went short at point 6. Notice they didn’t do a stop hunt on this swing high but instead move price sideways. Why is that? Because they wish to keep the traders trapped with a false sense of hope of price moving down while they continue to accumulate enough orders to make the big move they need to.

Point 7:

The swing high formed at point 7 matches the previous swing high point thereby creating a level or resistance above which will be a stack of buy orders from the stop losses and also from traders who wish to go long above that point on the break of the resistance level. Smart Money moves price sideways keeping it near the lows and this is deliberate so that they can absorb anymore sell orders they need to. Price then all of a sudden explodes upwards (probably induced by a news event) and price rockets up triggering the stop losses and buy orders stacked above point 7 in the process. This burst results in price moving up 260 pips in just one day! Smart Money meets their objective and retail traders are left to nurse their wounds once more! And the story goes on and on……

Chances are that you have been the victim of a stop hunt on many occasions. Anytime you have been in a trade and got shaken out of your position then it’s probably the result of Smart Money hunting your stops and manipulating price to do so in the process. The problem is that now you know this happens, stopping it from happening is difficult if you don’t know how to read Smart Money’s movements. This takes years to perfect and like all skills is something you need to practice in order to get right. You need to know what to look for in the charts – is price consolidating? That could be Smart Money accumulating orders so it means you need to trade very carefully and be prepared for changes in direction.

Are there any candles with long tails coming off previous swing points? Then that could indicate that a stop run has just taken place and you will be better off looking for trades in the direction of the stop run.

Parting Thoughts

Pay very close attention to your stop loss placement – are you putting it in too obvious a place, or are you keeping it too tight? Think about putting your stop loss further away so that you don’t get in the scenario of being stopped out too easily especially if price then goes in your original direction!

Learn to read the charts and look for clues on what the big institutions are up to. You can do this on our Forex Pro Programme or on our Master Trader Programme. In a nutshell, educate yourself then practice and continue to study the charts.

Find more great content check out below articles 

Forex Trading Strategy

Market Maker Manipulation

Stop Hunts & Market Manipulation

The Trader’s Journey

How To Create A Trading Master Plan 

Day Trading Vs Swing Trading Vs Position Trading – Which One is Best?

Trend Identification

Trading with Fibonacci Part 1: Who And What Is Fibonacci?

Trading With Fibonacci Part 2: Internal Retracements

Trading with Fibonacci Part 3: External Retracements

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