How Stops Drive the Forex Market
There are three aspects of stops:
1) The forex market lives to run stops
You can take this statement to the bank. The forex market is on a never ending quest to run stops. This is true across all time frames. It is what drives the price action, especially on an intra-day basis. Identifying where stops are lying gives a clue what side of the market is most vulnerable at any point in time. Given the opportunity the market, run by the algos, will look to run stops. When there are no stops left to run, a currency will generally settle into a range..
2) Using a stop with a meaning
When you place a stop, it is generally used to limit your loss when it should have a dual role, act as an insurance policy while giving your trade time to work until/unless proven wrong. I cannot emphasize the importance of the latter as I explain below.
Where you place your stop can make the difference between success or failure. Placing a stop based on the number of pips or percentage of capital you are willing to lose on a trade (e.g 1%, 2%, 5%, etc) has a chance of getting stopped out even when you have the right idea, I call this an artificial stop as it has no meaning other than to limit a loss.
On the other hand, placing a stop at a level that has a meaning rather than based on how much you are willing to lose has a better chance of success. In other words, placing a stop at a level that has a meaning to you and your system keeps you in a trade when right and only gets triggered if the trade idea has not worked out.
The difference between the two should be obvious – the first way you can be right and still lose while the second approach uses your system to set the stop at a level that has a meaning to it.
Stop Loss Running Equals Order Flow
The markets seek orders. Without new orders in the market, price will be at a virtual standstill. Stop loss orders sitting in the market are resting orders and when they get hit, it creates order flow.
Resting stop loss orders are actually converted to a market order when triggered. We all know that market orders have the risk of slippage and this is why you’ve had worse exits than your stop loss price.
Even better for those with the bigger trading capital, triggered stops can allow the them to get a better average price on their overall position. These big Forex players have huge orders that need to get filled, when they initiate it.
When they initiate a position, a substantial order needs to be filled and price can easily go against them – this comes as they create a large imbalance in the supply and demand. You’ve heard of “accumulation” in the market? This is where larger players scale into positions and try to not move price too far until they are fully committed to their position.
This is why accumulation is a range…..but there are signs of this occurring.
Hate the player not the game?
There is a way you can get on board with these bigger traders and I will cover that later in this post. Astute traders that understand price action already know this!
3) Offensive vs. defensive stops
Not all stops are alike. I have narrowed them to offensive and defensive stops. Understanding these two types of stops can make a difference between winning and losing. It is a concept I developed and not one you will find in the average trading book or education program.
Offensive stop – Maximizing profits when you are right is a way to improve trading performance. One way to accomplish this is through the use of offensive stops.
I call this type of stop an insurance policy. What I mean by this is using a stop to protect against some unforeseen news that causes a market to reverse. It is used when momentum is on your side and you want to maximize profits. The way to do this goes beyond trailing stops as I will show you when I describe our strategy. The Amazing Trader program will show this in real-time on your charts.
Defensive stop – This is the most common type of stop, as explained in #2 where it is based on how much you are willing to lose on a trade.
As you can see, stops can hold a key to successful trading. Understanding that the forex market is driven by a never ending quest to run stops can give you a clue which side is most vulnerable. Using stops with a meaning can allow your trade time to work when right and tells you when you are wrong as opposed to using artificial stops that have no relevance other than to limit your loss. Understanding the difference between offensive and defensive stops can help maximize profits.
How to put this into practice and utilize all of the above to your advantage is a key component of our strategy.
See video below
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