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.
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.
