I have read somewhere that market makers at times will take out stops first before making the move to the other direction. For example, before a stock moves up, the sell stops just below resistance are first taken out before going up. I am thinking this could be the reason why sometimes after I bought a stock near support, the stock goes down, takes out my stop which I thought was placed at a safe distance, and then moves up leaving me behind. Can anyone explain the logic of this strategy by market makers? I think it is important to know how market makers and professionals behave to be able to play decently in this field. Thanks.
You can only place your stops just bellow/above support/resistance of the time frame you are trading, there is nothing more you can do. If you are in the right stock there will be enough momentum to take the price well away from your initial stop. So relax
He's right. If the move is what you thought it should be than market makers won't be able to manipulate your stop. Robert Tharp
Thanks wwatson and rtharp for the comments. However, I am still curious to find out the reason behind market makers action to hit the stops first before letting the stock go the other way. Why do they want to take the stops out? Are they just scalping or is there any other strategical reason? Thanks again.
if your consistently seeing stops taken out by MM's below your support level...maybe your using the wrong time interval for that particular financial instrument. Simply, maybe on the 2min chart...price bounces nicely at support whereas on the 1min chart...they stops seem to be taken out below support and then price bounces nicely. By the way, you never mentioned what time frame you are using and what particular financial instrument. back to the market Nihaba Ashi
Not sure how much running the stops is done anymore with the diversity of execution routes other than MMs (sometimes see what looks like it could being done on the index futures though). But originally I believe the idea was to (for example) shake a bunch of people out of their long positions (thereby putting the shares back in the hands of the MM (or allowing the MM to cover their current shorts)) before they let the price go higher.
I used to be a MM and now I trade full time for myself. Where is the common stop orders placed by 75% of daytraders???? Up to .25 above and below day highs/lows or SMA convergence. MMs know these numbers to move a stock through and stop you out then run it the other way and sell back to the "daytrader" trying to play momentum. Stops are musts, BUT, use alerts. Alerts do not reside on a MM's book but on the alert server at your Direct Access firm. When your criteria is met, the alert fires and sends out mkt or limit order. Market ordes with Direct Access (DA) are not true market orders like you think. They chase the inside price and target ECNs so you get a much better fill.
Rubbles, I'm not sure about MM's but specialists get paid for every 100 shares they make a market in, so if they goose the price up a few pennies and trigger a slew of orders they profit. In other words, a major source of income for them is order flow. Market Makers may have a similar deal, I don't know. Maybe someone else does.
Think about what it means to a market maker to be holding a stop in the order book. In the case of a long stop-loss you've essentially advertised that you will sell the stock for a lower price than it is currently at. If the price is close enough that they can make a run for your stops, it'd be silly for them NOT to do it. Seeing a large glut of stops just below the current price must be an irresistible opportunity for a quick profit.
I find it interesting that many players in this game of ours feel that their individual strategy is unique, and that the others involved are unaware. Specialists are aware of FV considerations, stops (ins and outs), chart pattern breakouts (and breakdowns), and what do they do with all this knowledge?? You know what they do.... We always recommend alerts over stops in most cases. Since the "slingshot" or "shakeout" effect is common, you really don't want to have your order grabbed by the marekt maker or the specialist. This is a little less common with the Specialist system, but it still happens daily.