Before reading this article please read another article I already published about placing the stop loss and target orders, and the way they have to be set properly. I just want to make sure that you know what stop loss is in details. Then we can talk about stop loss hunting easier: Where Is the Best Place for Stop Loss and Limit Orders?
What Is Stop Loss Hunting?
As you know forex brokers make money when you take a position. They charge you some pips when you buy a currency pair. This number of pips that brokers charge when you buy currency pairs is called spread. Brokers offer different spreads for different currency pairs.
Spread is not the only way that forex brokers make money. It is one of the ways that Market Maker Forex brokers make money. They also make money through swap. Market Maker brokers who pretend to be ECN/STP make money through commission as well. However, commission is the only legal way of making money for the true ECN/STP brokers. They can make money through the other ways, but they are not allowed to.
Therefore, true ECN/STP brokers don’t make any money from the spread because it is the liquidity provider that receives the spread. However, whatever you pay as the spread goes to the market maker broker pocket. Additionally, the money you lose is the market maker broker profit because when you trade Forex through a market maker broker, in fact you are trading with the broker, not the real currency market.
So it makes sense if the market maker brokers like you to lose because your loss is their profit. On the other hand, it makes a lot of sense if they don’t want you to win because your profit is their loss. Market make brokers make a lot of money because 99% of the trader lose on their own and nobody needs to push them to lose. However, some market maker brokers get greedier and want to make more money faster.
Stop loss hunting is one of the ways they use to do that. They have some special robots or hire and train some employees who monitor the clients trades. When a client takes a short position and sets a stop loss and the market goes against the position and becomes so close to the stop loss, the robot or the stop loss hunter employee increases the spread manually to help the price hit the stop loss sooner.
For example you take a short position with EUR/USD at 1.3180 and you set your stop loss at 1.3280 that means you have a 100 pips stop loss. You have a short position and to close this position you have to buy. Your stop loss is always a buy order when you go short. You pay the spread only when you buy. So when you go short, you don’t pay the spread at the beginning. You pay it when you want to close your short position (you buy).
OK! Back to the example. You have a short position at 1.3180 and your stop loss is at 1.3280. The market goes against you and goes up to 1.3275 which is only 5 pips away to trigger your stop loss. As your stop loss is a buy order, then the number of the pips of the spread (spread pipage) has to be added to the market price. If the result equals your stop loss value which is 1.3280, the stop loss will be triggered.
It means if the market price plus the spread equals your stop loss level, then the stop loss will be triggered.
What does it mean? It means if someone intentionally increases the stop loss or the price, the stop loss will be triggered while it wouldn’t be triggered if the spread and the market price remained the same.
Back to our example again…
So the market is against you and is only 5 pips away from your stop loss value, but it doesn’t mean that it has to go up 5 more pips to hit your stop. If your broker charges you 2 pips for EUR/USD, this 2 pips has to be added to the market price which is 1.3275. Therefore, your buy price becomes 1.3277 which means it is only 3 pips away from your stop loss.
Now, if the market changes the direction, goes down and doesn’t go up for 3 more pips, then your stop loss will not be triggered. However, this is the opportunity that the scam market maker brokers wait for it. As soon as the market becomes so close to your stop loss, the broker increases the spread intentionally. So while the spread is 2 pips and the market is only 3 pips away from your stop, the broker adds at least 3 more pips to the spread to hit your stop loss, and then lowers the spread. This usually happens in less than a second.
You think you have lost your money in the market and because of the wrong position you had taken, but in fact you haven’t lost it in a real trade. The broker increased the spread to pretend that your stop loss was triggered. The money you have lost is in the broker’s pocket.
Please note that you can’t call it “stop loss hunting” as soon as your stop loss gets triggered. Novice traders who start trading with real money before they learn to become consistently profitable, are used to accuse the others, specially the brokers, when the lose, whereas in 99% of the cases they lose because of their own mistakes. Not all the market maker brokers hunt the traders stop loss orders. I mean being a market maker broker doesn’t necessarily mean that they steal from the traders. There are good market maker brokers too.
Therefore, before accusing the broker of hunting your stop loss, make sure that they have really did it.
Unfortunately, it is not that easy to prove that the broker has intentionally increased the spread to hunt your stop loss. If you do it they will say that the spread is not constant and goes up and down and they haven’t changed it. They are right. The spread isn’t constant and goes up and down based on the market liquidity and volume. However, it is somehow impossible to prove that it was the broker who increased the spread to hunt the stop loss, unless they do it by increasing the stop loss for tens of pips when there are no news release that causes the spread to go up suddenly.
Once a friend sent me one of his positions details. I checked and found out that the broker had increased the USD/JPY spread for 80+ pips while both of the New York and London markets were closed and there was no news release at all. There was no doubt that it was a stop loss hunting attempt by the broker. When the broker does it stupidly, you can easily prove that it was a stop loss hunting. But it is hard to prove it when the spread is increased for a few to few pips.
Manipulating the spread is the best and easiest way of stop loss hunting because it is hard to track, unless the broker does it very stupidly by increasing the spread dramatically, when there is no reason to have such an increase in the spread at that special moment. Even in this case, you have to take screenshots and do some calculations and prove that the spread didn’t have to go up that much, because the spread can’t be recorded anywhere on the platform. It is only the price which is being recorded, unless you use some special robots to record the spread on your own.
Some brokers are stupid enough to hunt your stop by changing the price. I say “stupid” because the price is always recorded on the price chart, and if you compare it with another broker, you will see that the price was very different at the moment that your stop loss was triggered. However, the broker can edit the price later and make it back to normal. But if they do it, you can easily say that there was no point to hit your stop loss because the price was far away. Therefore, brokers usually don’t change the price to hunt the stop loss or prevent the target from being triggered, unless they are very stupid.
Preventing the Target from Being Triggered
Brokers can also increase the spread to prevent your short positions’ target orders to get hit, when the price reaches your target level. But why do they do it?
If they let your target be triggered, your position will be closed and you will make some profit. This is what they don’t want, because as I mentioned above, your profit is their loss. But if they keep your positions open, it is possible that the price turns around and then they get the chance to hunt your stop loss and win some money.
Can the Brokers Hunt Your Stop Loss or Prevent Your Target All the Time?
They can do that if they want. They can increase the spread to any level they want. Of course, when the market goes to your direction strongly they try not to do anything because it will look too suspicious and they get caught. However, scam brokers increase the spread automatically through some special software or robots. It is not that hard to program a software to do all these things.
What Is the Solution?
Choose a reliable, well-known and true ECN/STP broker. Avoid market maker brokers as much as you can, unless you are 100% sure that they are good market maker brokers. Even in that case, don’t open a big account. Start with a small account to test the water first. Having no dealing desk doesn’t mean that the broker can’t hunt your stop loss. They can do whatever they want. The only thing that can prevents them from cheating their clients is that they really want to offer a good and honest service to everybody.
- Learn more about the ways that brokers cheat their clients: 6 Ways Forex Brokers Cheat You
- Learn more about ECN/STP and market maker brokers:
– The Difference of True and False ECN/STP Brokers
– How Do the Liquidity Providers Make Money and Are They Market Maker?
The other way to stay away from the stop loss hunting and all these kinds of problems is trading through a bank account. Learn more: Forex Trading Through A Bank Account
Trading the longer time frames is another way of staying away from stop loss hunting. Although nothing can 100% prevent a scam broker from cheating the clients, trading the longer time frames is a good way to lower the risk, because you will have wide stop loss orders that are harder to get hunt unless the broker increases the spread for hundreds of pips… although some brokers are not afraid of doing it.
In general, you will finally have to close your account and leave when you trade with a scam broker that hunts your stop losses and cheats, because nothing that fully stop them from cheating you. Therefore, you’d better to be choose a good broker from the first day or trade through a bank account.