As you know forex brokers make money when you take a position. They charge you some pips when you buy a currency pair. This number of pips that brokers charge when you buy currency pairs
is called spread. Different brokers have different spreads for
different currency pairs. Spread is almost the only way that the forex
brokers make money.
Of course, there are two kinds of brokers. ECN/STP Brokers who transfer your trades to liquidity providers (banks), and the ones that are market maker (they have a dealing desk). The first group usually doesn’t make any money through the spread. They have to charge commissions as their income. The spread you pay when you trade with the second group, as well as the swap and the money you lose in your trades, are all the broker’s income.
Good and reliable brokers are happy with the money they make legitimately. However, with market maker brokers, your profit is their loss, and visa versa. Therefore, they have to make you lose to make money. If you make money, they lose.
Stop loss hunting is one of the ways they use to do that. They have some special robots or hire and train some employees who monitor the clients trades. When a client takes a short position and sets a stop loss and the market goes against the position and becomes so close to the stop loss, the robot or the stop loss hunter employee increases the spread manually to help the market hit the stop loss sooner.
For example you take a short position with EUR/USD at 1.3180 and you set your stop loss at 1.3280. You have a short position and to close this position you have to buy. So your stop loss is in fact a buy order. You pay the spread only when you buy. So you don’t pay the spread when you go short. You pay it when you want to close your short position and so you buy.
Ok! Back to our example. You have a short position at 1.3180 and your stop loss is at 1.3280. The market goes against you and goes up to 1.3275 which is only 5 pips away to trigger your stop loss. As your stop loss is a buy order, then the amount of the spread has to be added to the market price. If the result equals your stop loss value, it will be triggered.
So the market is against you and is only 5 pips away from your stop loss value, but it doesn’t mean that it has to go up 5 more pips to hit your stop. If your broker charges you 2 pips for EUR/USD, this 2 pips has to be added to the market price which is 1.3275. Indeed, your buy price will be 1.3277 which means it is only 3 pips away from your stop loss. If the market changes the direction and goes down at this stage, your stop loss will not be triggered, but this is the opportunity that the scam brokers wait for it. As soon as the market becomes so close to your stop loss, the broker increases the spread. So while the spread is 2 pips and the market is only 3 pips away from your stop, the broker adds at least 3 more pips to the spread to hit your stop loss.
You think you have lost your money in the market and because of the bad position you had taken, but in fact you have not lost it in a real trade. The broker has increased the spread to pretend that your stop loss is triggered. The money you have lost is in the broker’s pocket.
Choose a reliable and well-known ECN/STP broker. Avoid market maker broker. Always check the reviews before you sign up. Do not be deceived by those brokers who are proud of having no dealing desk. Some of them may have no dealing desk, but they do have stop loss hunter employees.
Of course, there are two kinds of brokers. ECN/STP Brokers who transfer your trades to liquidity providers (banks), and the ones that are market maker (they have a dealing desk). The first group usually doesn’t make any money through the spread. They have to charge commissions as their income. The spread you pay when you trade with the second group, as well as the swap and the money you lose in your trades, are all the broker’s income.
Good and reliable brokers are happy with the money they make legitimately. However, with market maker brokers, your profit is their loss, and visa versa. Therefore, they have to make you lose to make money. If you make money, they lose.
Stop loss hunting is one of the ways they use to do that. They have some special robots or hire and train some employees who monitor the clients trades. When a client takes a short position and sets a stop loss and the market goes against the position and becomes so close to the stop loss, the robot or the stop loss hunter employee increases the spread manually to help the market hit the stop loss sooner.
For example you take a short position with EUR/USD at 1.3180 and you set your stop loss at 1.3280. You have a short position and to close this position you have to buy. So your stop loss is in fact a buy order. You pay the spread only when you buy. So you don’t pay the spread when you go short. You pay it when you want to close your short position and so you buy.
Ok! Back to our example. You have a short position at 1.3180 and your stop loss is at 1.3280. The market goes against you and goes up to 1.3275 which is only 5 pips away to trigger your stop loss. As your stop loss is a buy order, then the amount of the spread has to be added to the market price. If the result equals your stop loss value, it will be triggered.
So the market is against you and is only 5 pips away from your stop loss value, but it doesn’t mean that it has to go up 5 more pips to hit your stop. If your broker charges you 2 pips for EUR/USD, this 2 pips has to be added to the market price which is 1.3275. Indeed, your buy price will be 1.3277 which means it is only 3 pips away from your stop loss. If the market changes the direction and goes down at this stage, your stop loss will not be triggered, but this is the opportunity that the scam brokers wait for it. As soon as the market becomes so close to your stop loss, the broker increases the spread. So while the spread is 2 pips and the market is only 3 pips away from your stop, the broker adds at least 3 more pips to the spread to hit your stop loss.
You think you have lost your money in the market and because of the bad position you had taken, but in fact you have not lost it in a real trade. The broker has increased the spread to pretend that your stop loss is triggered. The money you have lost is in the broker’s pocket.
Why do they prevent the target from being triggered, by increasing the spread?
If they let your target be triggered, your trade will be closed and you will make a profit. This is what they don’t want, because as I mentioned above, your profit is their loss. But if they keep your trade open, it is possible that the price turns around and then they get the chance to hunt your stop loss.Can they succeed to hunt your stop loss or prevent your target all the time?
They can do that if they want. They can increase the spread to any level they want. Of course, when the market goes to your direction strongly they try not to do anything because it will look too suspicious and they get caught.What Is the Solution?
Choose a reliable and well-known ECN/STP broker. Avoid market maker broker. Always check the reviews before you sign up. Do not be deceived by those brokers who are proud of having no dealing desk. Some of them may have no dealing desk, but they do have stop loss hunter employees.
