I hear traders say all the time about how the big money takes out the stops. Why would they do that? Just to piss them off? I don't see the motive. The only reason I see for it is that maybe they might want to, for instance, short the market, but want short at a higher price, so they drive the market up, touch the stops creating a fake rally, and then short. Is that it?
To the people who move the markets, it's in their best interest to make sure that most people lose money. Taking out stops ensures that other people are losing money.
There are price zones where a majority of stops are placed, usually just outside a previous support or resistance level or just outside a previous bar's high or low. When price approaches the support or resistance level, or previous bar's high or low, you have traders whose positions will stop out if price pushes through, and traders who will put on a position or add to an existing one if price pushes through. So let's say price pushes through a resistance level or a previous bar's high. It triggers the stop losses of the short-sellers, and triggers the buy stop entry orders of the new longs and longs adding to a position. Then what? If the breakout occurs with conviction and price continues in that direction, the new positions are winners and the stopped out traders should be pleased they limited their losses. But if the breakout occurs with no real conviction, price can quickly pull back. This is a failed breakout and is often a great reversal signal. Because now the new positions who thought they were big winners on the momentum of the breakout are very nervous and in fact probably have stops just outside the low of the breakout bar. And those who added to an existing winner may also be ready to take profits if this breakout leaves something resembling a double top on the chart. So if the failed breakout pulls back and reverses, the longs will now stop out, counter-trend traders looking to pounce on a failed breakout will sell short, and the stopped out shorts will chase the market to get back in because they're pissed their stops got run. The breakout failed and everyone's selling now. So it's not so much that the big money is out to get you; it's just that the professionals know how to play the game well.
In addition to the above....If markets were a smooth curve everyone would just buy and hold. With all the price action people buy and sell, making the brokers for these transactions tons of money. Taking out the stops creates more volitity and price action causing more trades. Just think of all brokers fees that come flooding in when stops are hit. A wise ole trader once told me to wait 5 minutes after the open to set your stops because of how often stops are hit on the open.
I think it's in their best interest to make sure that THEY MAKE money, not that people lose money. Could you explain to me using clear logic how purposely driving the markets towards stops making people lose their money is making THEM money? Because even in the example I gave above, whereas they just want to short at a higher price, they would actually risk creating a REAL rally as others get off the sidelines and go long once they see a resistance broken. This doesn't make sense to me. There's two possibilities, there is either a conspiracy by big money to hit the stops (for what reason other than stop small traders out is unclear), or it is just price action being interpreted in a distorted way by frustrated traders.
Very well put. All it takes to move price one tick above a level where stops are triggered is you or me hitting the Ask at that price with a single lot. If big money comes in to drive the price, you can bet it won't be a false breakout.
NoDoji, you're DA man!!! You explained it perfectly! Now, I assume that the interest of the big money in creating this sort of a situation is that ANY price action is better than NO price action. In other words, they make more money in a vertical market than a boring consolidation, so they use the nearest "sensitive points" - the price slightly above the resistance line where most of the buy stops are gathered - to SET OFF the action. Same with support lines. I got it now! Thanks a lot!
Now that you know this, are you going to change your trading? Or was this just a general interest question?
Well, actually, I have been aware of the fact that the sensitive points of a chart - the resistance and the support - are the points where the biggest price action is bound to occur, but being aware and profiting from it are not the same thing. Ever since I had burned half my account on September 10 of last year, when ES price broke through the yearly high after I shorted it at that level and was stupid enough to sit, hope and pray (because yours truly has been fantasizing too much about making a million in a week) that it comes back down, I started paying the R/S lines, especially when it comes to very significant R/S lines, their due attention. Thanks to NoDoji, now I know who's to blame , and it is ME!)) I asked the question because I've lost count of the number of times I've seen this said by traders, with none of them ever actually explaining and some probably not even having a clue as to what they actually mean by it.