The fox and the market

[Forexfux]

I have a question: What does the star mean left beside the thread topic?

[mjws00]

It designates a thread you have posted in.

[f451]

Thanks for this thread Stefan, great stuff.

Would love to hear more about stop cascades and how to identify when that's happening from PA on a chart, and the rest of the significance of wicks.

[Forexfux]

It designates a thread you have posted in.

good to know. thx for the answer.

[Forexfux]

Thanks for this thread Stefan, great stuff.

Would love to hear more about stop cascades and how to identify when that's happening from PA on a chart, and the rest of the significance of wicks.

Hello f451,
good question because it's not clear how exactely SL cascades get triggered.

Stop-loss orders can contribute to rapid, self-reinforcing price movements which are called "stop cascades" or "price cascades". A dealer's job is to offer liquidity in order to make the market. It's their business to avoid stop cascades.

(written by Dali in his OF thread)

"While there are looking to make some profit from short-term trading, their main task is to provide clients with liquidity and get them filled with less as possible slippage. Let's go through a scenario:

EUR/USD is trading at 1.3050 and Dealer "A" sees many of his clients have buy stop orders from 1.3100 up to 1.3110. This means those clients want to get out of their position once price breaks above the determined rate. If he does nothing and waits for price to break above 1.31, he will have trouble filling his clients without slippage. There will be stops from other market participants above 1.31 and other dealers will be acting similar, pushing price higher fast. He would fill his clients at a bad rate, earn nothing from it and his reputation would be seriously hit if this would happen several times.

So what can he do? He can gradually start to accumulate a long position and anticipate a break of 1.31 into the stops. Dealers tend to have a great feeling for short-term moves and are skilled for having "a feel for the market". If he gradually buys EUR/USD all the way up to 1.31, he will be able to fill his clients without slippage and will make a nice profit from it.

More detailed example:

DEALERS ORDER BOOK:

Buy Stops from 1.3100 - 1.3110 worth $100 million

DEALERS ACTION:

Buy 20 million @ 1.3060
Buy 20 million @ 1.3075
Buy 20 million @ 1.3080
Buy 20 million @ 1.3085
Buy 20 million @ 1.3090

Net position = Long 100 milion @ 1.3079

So he will distribute his position as price breaks above 1.31 and fill his customers stop loss orders.

This can of course go wrong if price fails to maintain the upside momentum and turns lower. The dealer must then quickly get out of his position. But again, those traders are skilled at managing their positions and while they can't be right all the time, like other traders cannot too, they have a good feel for the short-term moves."

SL cascades means hurt for the dealers clients. Retail traders are not affected by this problem because of their tiny positions. But big clients suffer damage.

In theory a stop cascade happens when there are more sl orders than take profit orders/limit orders. That would imply that the book of a dealer is not big another to handle the sl orders of his clients and other dealers are aiming for higher sl clusters of their clients.

It's important to distinguish between news/high momentum driven moves and sl cascades. When news are responsible for price to move through clusters of stops then it's because of overwhelming aggressive order flow. But sl cascades can not be explained by news. They are based on the priciple that the triggered SLs are responsible for a fast move. On the charts you get often fat tails when this happens.

Here is an example:
from a C.L. Osler paper

With regard to the March 7, 2002 drop in dollar-yen, for
example, Deutsche Bank noted the following: "Without any news to trigger the move, Japanese
accounts aggressively sold USD/JPY, which in turn triggered successive waves of stop-loss
orders. The first wave of stop-loss selling occurred on the break of ¥130.50 and then again on the
break of ¥130. Once below ¥129.80, USD/JPY fell within seconds to ¥129.40 . . ."


Stop cascades can also happen on a smaller tf.

So when you want to find stop cascades you must watch out for sl clusters on the chart.

[Forexfux]

Hello,
I have decided to finish this thread at this point. My intention was to show the rough framework of OFT and I think the job is done. There is alot more to learn about OF but it will go more and more into details. I hope the thread contains some useful informations which help to understand the markets better.

I wish you all the best.

Stefan

[Jemook]

Thanks for showing us some brilliant insights Stefan.. I hope you will stick around and keep posting

Regards,
Jeremy

[123Reverse]

+1

Sorry to hear you are not continuing with this thread. However I appreciate it must have taken a lot of your time and all credit to you for taking it this far.

[lhDT]

Thanks Stefan !

[Forexfux]

Hello,
thank you for your friendly words.

I have posted from my point of view some significant informations I have found during my studies of the "trading universe". There is so much bs out there that makes it hard to find the good stuff. Additionally not every wisedom fits every one's personality.

Nowadays I know that it's a mistake to spend the whole available learning time with reading and more reading (books, forums, articles...) in the hope to find more and more that makes someone better as a trader.

Yes when you find pices of wisedom by great traders you can improve as trader but real trading skills get "formed and forged" by observing the charts. When I say charts I mean pure price without indicators. It's important to monitor price in real time as well as by backtesting.

So here is my recommendation: Spend more time with your charts. Even if the thread contains nice informations you can only become the trader you want with the help of screentime, screentime and more screentime.