So what’s stop-hunting, exactly?

When I was just getting started trading forex, one confusing term I heard mentioned frequently on traders’ discussion forums was “stop-hunting.” When someone finally got around to describing what stop-hunting was, it sounded very familiar: finally those weird, short-lived price spikes I’d see occasionally on my broker’s charts made a bit more sense. I was convinced my own stops had been “hunted” on more than one occasion, and I can’t say I was too pleased about it.

In a nutshell, stop-hunting is a “sport” (allegedly) carried out by institutional traders at banks and market-makers at retail forex brokerages to drive the price into their customers’ stops or the stops of other traders. Since an unscrupulous brokerage can quote its own internal forex prices, it has the ability to move its prices substantially from the normal interbank rates to trigger customer stops. The broker can then perform its own arbitrage with those stop-loss orders by clearing the currency lots obtained in its stop-hunt at a better price with its interbank counter-party. Let’s say your stop’s set at 1.2855 and the broker can sell that lot into the interbank market at 1.2860 – well, in this loosely regulated market, they might just go on a stop-hunt.

But this is just my own (admittedly limited) understanding of how stop-hunting works. For insight into the sport from someone who really knows what they’re talking about, this forum post should be extremely enlightening.

As I’ve noted in a previous post on setting stop-losses, some traders don’t use any stops at all. While this definitely requires a strong constitution and in-depth knowledge of market behavior, it does save you from having to worry about stop-hunting. Personally I think you’d be better off using stops, and just placing them at a price where they’re unlikely to be triggered by a stop-hunting spike.

Now, I think I may go reconsider a few of my own stops.