Question

Hi Anna,Thank you very much for the wonderful insights you provided in a your books. I’ve purchased 3 of them (2 on Forex and 1 on VPA). My favorite is the one on VPA which truly opened my eyes to the different stages of a trend and understanding the relationship between price and volume. I’ve used candlesticks for about 8 years and must say that combining candlesticks with volume is a powerful combination indeed! Thank you :)I do have a question in regards to placing stop loss orders in the Forex Market. If the market is as shady as you’ve indicated, why would anyone want to place a stop loss order which the market makers will see and take advantage of you and/or your position? It seems that one will be opening themselves up to an uneven playing field.

Answer

Hi – Many thanks for your email and for purchasing my books. It is very much appreciated, as are your very kind and generous comments. I am always delighted to hear from fellow traders as this allows me to address their questions and comments in my live webinars and seminars. With regard to the placing of stop orders, you are correct they are visible not least to both the market makers and your broker. However, a stop loss (in my opinion) is mandatory for several reasons, not least of course because it protects your most valuable asset – namely your trading capital. If you lose your capital then you are out of the game, and the maths of attempting to recover from a loss is always working against you. Let me give you an example : If you lose 10% of your trading capital, then you have to recover 11.1% to return to your starting point. If you lose 25% you will need to recover 33% and if you lose 50% of your trading capital then to return to par you need a 100% return. At this point you are simply gambling, in other words, it’s double or quits which is why a stop loss is one of the most important rules of trading.

With regard to what is often referred to as ‘stop loss hunting’ this is a tactic employed by both market makers and certain brokers. As far as the market makers are concerned there is little we can do as retail traders and you will see this type of behaviour reflected at every major news release. The NFP is a classic example where the market will jump initially one way on the release, only to reverse very quickly minutes later once the stop hunting exercise has been completed and traders taken out of the market. It is a very cynical practice but a trading fact of life which is why news trading should be approached with great caution. Moving to the brokers, whilst this practice was commonplace in the days when most brokers were dealer brokers and simply traded against their clients. In today’s market retail traders can now opt to use ECN or STP type brokers where every order is passed electronically to the interbank pool. This, at least, avoids one element of stop hunting. The most transparent brokers are those who charge a small commission as there is no such thing as a ‘free lunch’ where the cost of trading is built into the spread. Finally, to consider to stop loss placement this is something I explain extensively in my forex training rooms but in simple terms it is the congestion phases which offer the safest and most logical place for any stop loss. The reason for this is simple as it is market that is telling us where it has found resistance or support, and once a market moves away from these regions then any stop loss (above or below) is protected by this natural barrier created by the market. Of course, any stop loss and subsequent management should always fulfill your risk and money management rules. One final point always remember to avoid placing any stops at 5s and zeros. Hope the above helps and thank you again for taking the time and trouble to write to me. Kind regards and wishing you every success with your own trading.