The fox and the market

[mrelectron]

<snip>
... should study market structure. There are lots of free pdfs.
</snip>

Hi FF:

I'm more than happy to do my own searching, the problem is knowing what is good information and what is bad or irrevelant information. If you have any particular PDF's, books or other resources in mind, are you able to post links.

Thanks
Mark

[Forexfux]

<snip>
... should study market structure. There are lots of free pdfs.
</snip>

Hi FF:

I'm more than happy to do my own searching, the problem is knowing what is good information and what is bad or irrevelant information. If you have any particular PDF's, books or other resources in mind, are you able to post links.

Thanks
Mark

Hello mrelectron,
that's a very good question. I think that digging through all the BS out there is part of the learning progress. You have to find a method that fits your personality. If you read something in a forum and you notice what has been writen is not logical or don't work or on the other hand make sense and do work then it's what is building and forming you as a trader (I'm sure that sentence isn't correct ).

I know a trader who is backtesting price behavior with passion. He is doing it by downloading historical data and then scrolling left as much as possible. He starts with the 1m TF and analyses every turn in price till the recent day. He is doing that parallel on every TF available. Today he can trade the charts back and forth.

What I try to say is thinking about and testing ideas, claims, market and price mechanics etc. will improve your trading skills. When you know what traders are doing wrong you will know what the weak side of the market is doing and why.

I hope that helps

[Forexfux]

Time frames

CJ said that for him the 5m time frame contains too much noise. I don't think so. Can you tell me which of the attached screen shots is the 5m and which is the weekly tf? No? Me too because I forgot which one was the 5m and which one the weekly after I have prepared the ss.
Seriously the price dynamics are the same on every tf. But nevertheless there are main 2 reasons why it's "easier" to trade the higher time frames.

1) The higher time frames are building slower. You are able to think longer about your entries and exits and you can monitor more pairs.

2) That's the main reason and I don't know why I'm the first one who makes that point. The trading costs are much higher on lower time frames. Lower time frames can crash a profitable trading method. I think that's one of the reasons why many traders lose.
When you trade the 5m tf with a 10 pip SL, 20 pip TP and 100.000 EUR you will earn or lose the same amount like when you are trading the 4hr tf with a 100 pip SL, 200 pips TP and 10.000 EUR instead. But the difference is that the impact of the spread and the slippage is much higher. A spread of 2 pips equals 10% of your trading gains or 20% of your losing amount on the 5m tf. On the 4hr tf it's only 1% and 2%. The spread kills you on lower time frames.
The same with slippage. Imagine you hit the buy button at 1.5052, your TP is 1.5065 and your SL is 1.5042. Unfortunately your order execution is a little bit delayed and you get only 1.5055. On the 4hr tf that doesn't matter but on the 5m tf it hurts. Your SL will be now 13 pips instead of the planed 10 pips.

I hope you get my point.

[Forexfux]

What a nice and easy to understand article about stop hunting:

"Stop Hunting" -- What is it?

You've probably seen it mentioned in various trading forums. It may have even happened to you a few times. It's enough to make your head explode. What is it? It's called Stop Hunting.

Here's a typical trading situation. You're convinced that the USD/JPY is heading up. You've entered a long position at 123.40 and you've set your stop at 123.05, slightly below an obvious double bottom. You set your initial target at 124.50, giving you more than a 3:1 ratio of reward to risk. Unfortunately, the trade begins to go against you and breaks down through the support. Your stop is hit and you're out of the trade. You're sure glad you had that stop in place! Who knows how far it could drop now that it's broken that support, right?

Wrong. Guess what happens next. You got it...after taking out your stop, the price turns right back around and heads north, just as you originally thought it would. As you watch from the sidelines, the pair moves up past 124.00, then 125.00, and never looks back. Just maddening. You start to think, "If only I had set the stop just a little lower. What lousy luck!" But is this really just a case of bad luck?

Let me relate one of my own recent trading experiences. Based on statistics from my Price Behavior Map (see previous article), I went short the AUD/USD at around 0.7530 and placed a stop up at 0.7570 which was above a local top. I was looking for the price to decline to below 0.7300 over the next few weeks. Within a day or so the price spiked up, took out my stop and then moved back down into the consolidation area at around 0.7540. Now, because of this last spike, there were two local highs on the chart near 0.7570. Not to be deterred from my trade, I re-entered my short position in the 0.7530 area, and this time I put my stop at 0.7580, just above the last spike. After all, what were the chances that the price would break through that resistance again? Well as it turned out, that's exactly what happened! The price spiked up and hit my stop again, knocking me out of the trade for a second time. And even more frustrating, as soon as my stop was hit, the price turned right back down again in the direction I had originally anticipated!

Ian Fleming's character, Goldfinger, once said, "Once is happenstance, twice is coincidence, three times is enemy action." (Play James Bond music here...)However, I wasn't actually paranoid enough to think that someone was specifically picking off only my stop orders of course. First of all, my trades were so small that no one would bother trying to pick them off, and secondly I was doing these trades in a practice demo account! But I bet I wasn't the only dunderhead that was putting my stops in that obvious position just above the recent highs. There were probably quite a few buy-stop orders in that price area, and it certainly looked to me like someone was gunning for those stops. This hypothetical someone may have been a stop hunter.

So what's a stop hunter and what's all this stuff about picking off stop orders? A stop hunter is a market player that attempts to trigger the stop orders of other traders for their own benefit. They generally have the capability to move the market by a small degree for a short period. The stop hunter may be a FOREX broker's dealing desk which is trading in competition with its customers or it may simply be a large player in the market; a bank, a hedge fund or whatever.

Stop hunters operate best in an environment where most traders believe that the market is about to move in a certain direction. As traders take positions, the inexperienced ones (like me in the trade above) will place their stops at obvious places in order to cut losses if the price moves in the other direction. The stop hunters know where the amateurs are probably placing these stops, so they try to move the market enough to trigger them. This may allow a stop hunter to enter a trade at a good price before the market begins its move in the direction that everyone expects.

For example in my short trade above, there were a lot of indications that the market was headed down. Stop hunters knew that a lot of traders had taken short positions, and had probably positioned their buy-stops up at the 0.7570 area. So why should these savvy stop hunters enter a short position at 0.7530 when so many willing amateurs were willing to buy from them at 0.7570? So they proceeded to push the price up to 0.7570, and when my buy-stop order was triggered up there, guess who I was buying from? Exactly...the stop hunters who were selling to me at a great price (for them). Now I was out of the market, and they had taken over my short position at a price 40 pips above where I entered it. I had a 40 pip loss, while they entered at a price that was 40 pips better than they otherwise could have. Then, when the market headed down as we all expected it would, the stop hunters were laughing all the way to the bank while I was sitting on the sidelines pulling out what little hair I have left!

Note that a situation in which everyone expected the market to move up would work in just the opposite fashion. The amateurs would have their sell-stops at some obvious point below the market, and the stop hunters would push the market down in order to trigger those sell-stop orders. Then the amateurs would be selling out of their long positions in a panic while the stop hunters were buying from them at great prices in expectation of the coming move north.

The type of stop hunting that I've just described is used in situations where most market participants expect the price to move in a certain direction. In this situation, both the savvy stop hunters and the amateurs have the same market opinion; they are not battling each other in a contest of bulls vs. bears. The stop hunters are just trying to take over the positions of the amateurs at a good price.

There is another situation in which stop hunters try to move the market toward a group of stops in the hope that triggering the stops will push the market further in the same direction, thus triggering even more stops and so forth in a snowball effect. This is how some short term panics and rallies are created. In this case, the stop hunters have taken positions in the opposite direction from the amateurs, and are simply trying to trigger the stops to get the amateurs to panic and keep the ball rolling in that direction. My guess is that this tactic is more prevalent in less liquid markets like stocks and futures as opposed to FOREX.

In my next article, we'll talk about how to place better stops and how to plan a trade to benefit from the stop hunters instead of letting them eat your lunch.

Scott Percival

[Forexfux]

Sessions

CJ already explained very well how sessions work and how to trade them. I don't want to deepen this concept.

I only want to add something. It's based on my own thoughts so take it with caution :

Bank activities are covering all sessions. When the fox in NY has finished his day the fox in Tokyo will take over and so on.

The fox in Tokyo can now continue the game the fox in NY has started or he will start a new one. For example if there is a stop hunt or another typical pattern to collect liquidity in the late hours of a session then fox of the next session usually will continue the game. If there wasn't a pattern the fox of the next session will start his own game in the early hours of his session. After the fox filled his orders he wants to be rewarded. Therefore there are good moves during a session after a fox stop hunt at the beginning of a session.

Because I think my explanation is confusing I'll try to show it on the charts

Notice
a) when I say that the fox starts his new game I don't mean he will reverse the trend. He can continue the trend after he generated a retracement including a stop hunt.

b) this session plays are part of the bigger game/picture. Don't think the fox holds trades only for 5 hours. Or don't think the fox will get his orders filled in a few minutes.

I hope that makes sense

[sk29]

Scott,

I've read the first 6 pages three times now and I find your style of writing to be exceptionally clear. I have been reading CJ's thread and have been learning a ton from him. Your thread is an amazing complement to CJ's thread as it helps clear up some of the definitions I really needed. Example, your article on Stop Hunting cleared up a thing or two in my head that was preventing me from "seeing" the fox at work. Another example is your post on how most "normal" market movement is only there is facilitate orders. This cleared up another muddle in my head as I was previously too caught up with identifying range expansions, HODs, LODs, and for got that net net all this is to accumulate positions.

Please continue your great work.

I usually don't post much because I dont have much to say -- i'm still learning.

However, I was compelled to post today because I think great traders and thinkers like yourself and CJ must be appreciated for the effort.

Both you and CJ can just trade for a living and not even bother sharing all this with us on this forum here. Instead, you both carve out a significant part of your daily lives in charting examples and writing detailed posts.

Thank you so much.

Now, I'm going back to page 1 and start making notes

Sessions

CJ already explained very well how sessions work and how to trade them. I don't want to deepen this

[Forexfux]

Scott,

I've read the first 6 pages three times now and I find your style of writing to be exceptionally clear. I have been reading CJ's thread and have been learning a ton from him. Your thread is an amazing complement to CJ's thread as it helps clear up some of the definitions I really needed. Example, your article on Stop Hunting cleared up a thing or two in my head that was preventing me from "seeing" the fox at work. Another example is your post on how most "normal" market movement is only there is facilitate orders. This cleared up another muddle in my head as I was previously too caught up with identifying range expansions, HODs, LODs, and for got that net net all this is to accumulate positions.

Please continue your great work.

I usually don't post much because I dont have much to say -- i'm still learning.

However, I was compelled to post today because I think great traders and thinkers like yourself and CJ must be appreciated for the effort.

Both you and CJ can just trade for a living and not even bother sharing all this with us on this forum here. Instead, you both carve out a significant part of your daily lives in charting examples and writing detailed posts.

Thank you so much.

Now, I'm going back to page 1 and start making notes

Sessions

CJ already explained very well how sessions work and how to trade them. I don't want to deepen this

Hi sk29 and welcome,
your compliment is almost too nice to clarify the misunderstanding. I'm not Scott Percival. Scott Percival is the guy who wrote the article I have posted. Like you I have saved everything important during my journey of research.
I could try to repeat the knowledge I have learned with my own words (what I'm doing partly) but often I think it's better to quote great traders. First of all because the glory belongs to them and secondly they made a better job than I could do.

Btw my name is Stefan

[Forexfux]

Another one by Scott Percival

Placing Better Stops

Introduction

The importance of well-placed stop orders to a FOREX trader cannot be over emphasized. The margin percentage required in a typical FOREX account is so small that a fully leveraged trader could easily lose a substantial amount of their net worth from a single position if it moves too far in the wrong direction. The name of the game is risk control and the key tool for protecting your account from substantial losses is the stop order.

That being said however, I do know some traders who claim never to place stops. Usually the rationale for this is that their trades are very short term (on the order of just a few minutes) and they are watching the market during the entire trade, finger twitching on the exit trigger ready to bail out at the first sign of trouble. Even when I counter this with arguments that a stop will provide the discipline needed to avoid the "deer in the headlights" syndrome or that stops can protect them when their system crashes, I still meet with stern resistance to the use of stops. Eventually I came to understand that this resistance can stem from the frustration of being stopped out of good trades much too often.

And frustrating it is! In 2004 I opened up my first FOREX account with just a few hundred dollars in order to test out the waters a bit. I figured, "OK, how hard can this be? I'll just set my targets at three times the distance to my stops so I'll have a 1:3 risk/reward ratio. Then, all I need to do to make a profit is be right more than 25% of the time on my trades. Any dolt can do that, right?" Well this dolt apparently couldn't, because about a dozen trades later I think I may have hit my target about twice. Every other trade was stopped out. Unbelievable. What was happening?

There are a couple of possible explanations for this. The first and most obvious is that I was simply setting the stops too close. This may have allowed the random "noise" of the price movements to trigger my stops. Another possibility is that either my broker's dealing desk or some other heavy hitter in the market was engaging in "stop hunting". I've written a more complete article on this subject already, but basically this involves market players who try to push the price to a point where they think a lot of stop loss orders will be triggered. They do this so that they can either enter the market at a better price for themselves or to cause a snowballing move in a direction that benefits their existing positions.

Let's deal with the first issue of placing stop orders too close. Traders may do this for a couple of reasons. Some may do it because they are following a risk control rule involving the maximum loss that they are willing to take, while others are simply choosing inappropriate places on the chart for the stop. We'll look at each of these cases in detail.

Stops determine size, not the other way around!

Money management and risk control rules are great, but make sure you apply them in the correct sequence. Let's say you have a rule that you will risk no more than 1% of the account equity, or $50, on a single trade. You decide to take a short postion on 10,000 NZD/USD at 0.6600 which means that each pip of movement will equal $1.00. So your stop should be 50 pips back at 0.6650 right?

Well actually...not really. This reasoning is backwards. We took our money management rule and our position size and used those values to calculate our stop loss point in the market. But this doesn't really make sense because why should the market care what your rules and position size are?

We really should be placing the stop loss at some logical place based on the chart. Let's say we look at the chart and see that a good place for a stop would actually be 80 pips back at 0.6680 (we'll discuss how to find good places for stops next). This presents a problem because if our position size is 10,000 then our potential loss is $80 which violates our money management rule. That's not acceptable, so how can we put the stop at the stop at the logical point of 0.6680 while still only risking $50? Well, we only have three variables to work with and we've already decided on our maximum loss and stop location. The only other thing we can change is position size, and that's what we need to do. If we cut our position sized down to 50/80 x 10,000 = 6,250 then we're all set. We can put our stop in a logical place, while still following our rule of only risking $50.

In summary, Let your stop location determine your position size, not the other way around!

Where should the stop be?

Every trader will have different methods for placing stops, but a common theme among many of them is that a stop should be in a place where it will only be hit if you are obviously wrong about the trade direction. Many traders just look for the nearest local high/low or resistance/support line and place the stop on the other side of it. However, prices exhibit false breakouts all the time, so just because one of these obvious support/resistance points is breached does not mean that the price will continue in that direction.

So how do you find that place that indicates that the price is "obviously" going against you? Do this by pretending that you are considering placing a trade in the other direction. What kind of price action or indicator signal would tell you that the trade was headed in that direction? What would you need for confirmation? For example, suppose your actual trade is going to be a long position on the USD/JPY at 118.40. There is a recent double bottom down around 118.10, and most traders will probably place their stops a little below that. However, you begin thinking about what would make you want to go short the pair. You might think, "Well sure, if it breaks that double bottom that would get my attention, but that's not enough. It would probably have to retrace a bit first forming a lower high, and then move down past this consolidation area here at 117.90 for me to be really convinced of the downtrend." Now you've found a place where the price should definitely not be if you're right about the long trade. So put the stop down there, and there will be less chance of it getting hit.

Of course you don't have to use chart patterns to do this. You can use any indicators that you're comfortable with to go through a similar procedure. Suppose you like moving averages. You might decide that if the 10-bar MA crosses below the 50-bar MA then that would definitely indicate a downtrend. As you look at the chart, you see that this crossover wouldn't happen until the price reached about 117.75, so maybe that's a good place for the stop. You could use Fibonacci retracement levels, Bollinger bands, or many other tools to go through a similar thought process.

The point is to place the stop at a place where you would be totally convinced that the price is going in the direction counter to your trade. Don't place it in the obvious places with everyone else's stop!

Don't fight the "stop hunters." Join them instead!

One of the main reasons you don't want to have your stop in an obvious place like just behind a local peak/valley or right at a nice round number is that stop hunters will often try to trigger stops in those locations. I've discussed how and why they do this in a previous article, so now let's look at how you can take advantage of this practice yourself.

In that previous article, I described a trade where I was convinced that the AUD/USD was going to head much lower from the 0.7540 area. There was a local top near 0.7570, so I placed my stop there and got taken out when the price spiked up past that point. The price turned back down and I entered another short position at around 0.7530. Being a glutton for punishment I suppose, I put my new stop at 0.7580 which was just above the spike that had taken me out before. "No way it could happen twice in a row" I thought. Wrong. The price spiked up above 0.7580, took me out and then headed south again!

What could I have done instead? Knowing that the recent top would be an obvious spot for traders to place their stops, I should have avoided that area like the plague. There was a brief consolidation area further up in the 0.7620 area, and a less obvious and safer place for my stop would have been just above that. But then I would have been taking a much bigger risk and would have had to reduce my position size to compensate. Unless...unless I could somehow get a better entry!

That's where the idea of using the stop hunters to my advantage comes in. Knowing that everyone probably had their stops up at 0.7570 or so, and knowing how the stop hunters (sometimes) work, I could have made an educated guess that they would try to push the price up there to take out those stops. So instead of entering at the current market price of 0.7530, I could have placed an entry order at about 0.7570 and just waited patiently for the stop hunters to accomodate me by pushing the price up there. Then I could be entering the trade on the short side at 0.7570 along with the knowledgeable heavy hitters instead of being taken out of my position at that point along with all the sheep.

The key to this is having the patience to wait for the better entry. There are certainly some variations on this trading tactic too. If you're not sure that stop hunters will try to push the price to your hoped for entry point (or if you're not sure that stop hunters exist at all), you might want to enter part of your trade at the current price, and place an order for part of it at the better entry price. That way, if the stop hunters don't accomodate your clever plan of taking advantage of them, you will still be in the trade for a smaller amount. This also compensates for the fact that your stop is further away.

Conclusion

So to summarize:

1. Pick your stop location first, then base your position size on that, not the other way around.

2. To find a good place for a stop, pretend that you're considering a trade in the direction of the stop. Where would the price have to be to convince you that it was really moving in that direction?

3. Don't put your stop in obvious places like just behind highs and lows, just beyond obvious support/resistance levels, or at nice round numbers.

4. Use stop hunting activity to your advantage by placing your entry order near where you think most people have placed their stops.

I hope this helps you place better stop orders and avoid getting taken out of the market so often, especially when you're right about the trade direction. Maybe those of you out there who have sworn off using stops in the FOREX market will reconsider as well. Good trading to you!

[Forexfux]

Limit orders again

I want to expand the model how institutions accumulate and distribute their positions.

All market participants are using limit and market orders to enter the market. I have described before how institutions are using limit orders at the end of a stop hunt to fill their orders. Furthermore institutions are using limit orders since most of their orders dont get filled at the first try. This is why they create the waves up and down usually buying and selling in zones of interest. When they are doing it we see Ws/Ms or ranges on the charts.

Institution orders dictate market movements and usually when they decide on a direction there is rarely anything to stop them. Look at the screen shot below. When there are not enough sell stop orders placed and in addition not enough short market orders to buy from the institutions get only partial fills. Because institutions are eager to get the best entry prices they can get they don't want to buy the market up and create a V turn. So they need a second, third or fourth visit for a complete fill. This happen when price reachs the first time the yellow zone and turns. The institutions decide at this point to drive the market up but the uninformed traders don't know it. The market seems to be in balance but it never is because institutions are accumulating positions in a hidden manner.
Okay now what are they doing after the first turn. They know that uninformed traders still think the down move will continue and therefore they drive the price to a zone where the uninformed trader thinks the price will turn in the direction of the trend. So retail trader jump in and sell while the institutions took out some of their positions to fuel the move down. The price comes back to where the insitutions have left their limit orders. After retail sell orders help to fill more of the insitutional orders they get trapped at the bottom and are forced to exit as the wave goes up again, this causes additional buying pressure since covering short is essentially buying and thus pushing the price up higher even more. The institutions can repeat this play as often as they need. When they are completely filled price will shoot up.

[madpipa]

I Stefan,

I have been following this thread since it started & just had to say you are making lots of things much clearer for me. Most of these concepts I have come across before - I even understand some of them. But for some reason your in-depth explanation of a number of these ideas has really turned the light on for me. I don't know if I can see the fox quite yet, but I know I saw some paw prints the other day!!

Thanks for your time & effort to create this thread. I'm sure there are many more lurking here like me who appreciate your efforts. And I note how no-one has asked for you to clarify anything you have said. That shows that your grasp of English is a good as your understanding of foxes.

I look forward to future instalments.

Thanks again & cheers,
Mick