Stop Loss Hunting by Forex Brokers – What to Do?

Posted by Gopalakrishnan Ravichandran on

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.

 

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.

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


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