A member asked:
Fist let me say I’m loving the course. You did a very very nice job. Lots of info, but slowly assimilating everything.
I’m on the stop hunting section and had a quick question. Perhaps it’s an insignificant point.
You had a scenario play out where a hedge fund has a large long position resulting in a nice paper profit. They did a risk/reward of gunning some topside stops for a nice liquidity pool to unload into. This all makes sense to me except for the part when they calculate how much further the market would move once the stops are tripped.
If the goal is to exit the position to realize the paper profit, why would they concern themselves with the market moving beyond the stops? Wouldn’t make the most sense to put all of their offer limits directly above the large stops in order to gain the most liquidity benefits instead of 10-15 pips above? Or why not put their limits right on the stops, don’t market orders get filled first? My confusion is that if the fund correctly liquidates at or 1 pip above the stops, any market movement to the upside beyond that is of no concern to the fund as that meant their entire limit order was filled and objective complete.
Hmm.. or are they waiting for additional stops tripping above, for example the additional layers you spoke of.. Perhaps I answered my own question?
I remember most of what I wrote, but if you can kindly link to the lesson where I gave the example, it would make it easier!
It can be important to know how much further the market will move once the stops are tripped.
One way as you say is they immediately liquidate right at the stop level or 1-10 tics above it. That is certainly one choice they have.
But they have other choices as well. They need to keep an expansive mindset. Because there will be situations where they trip topside stops and they liquidate everything right within 1 tic of the stop area and they were right to do so because the market came straight back down.
Other times, the market will trip the topside stops, the hedge fund takes profit too quickly, the market absorbed those sell limits, then rockets higher another 10, 20, 30 or 50 pips.
Sort of like with the EUR/USD tripping stops above 1.3300 this past week. If you took profit at 1.3301, you left a lot of money on the table if you were an intraday player. Why should they sell $1 billion at 1.3300, when if they wait another half hour or 1 hour, they can sell that same $1 billion 30 ticks or 50 ticks higher?
There are different components to the stop hunters reward risk component.
- One is how much money they need to gun the market to the stops
- The second is how big are the stops
- The third is how much the market can move once the stops are tripped. (can trip further layers of stops, or cause a sent/psych shift, or go for the jugular type trade)
- When they go unload with market orders, how much will the market move back
There are so many different scenarios:
There are times when there will be big stops tripped, but they run smack into big limit orders from other players, so the price may not move much. It may only move 1-5 pips.
Then there are other times when big stops are tripped, but they don’t run into big limit orders and the market can move 10-30 pips past the stop point.
The nirvana for them is when they only need a small amount of additional capital, to trigger big stops, where there are small standing limit orders to absorb them, the market moves a whole bunch, say 30-50 pips, and when they go unload at the market, or with limit orders, the market absorbs it all without moving back at all. That is nirvana for them.
The flipside and horrible situation is if they spend a whole lot of money, to trigger small stops, where there are huge standing limit orders to absorb them, the market barely moves, say only 3 pips, and when they go to unload at the market, the price retraces a whole bunch of the move and the stop hunters lose a bunch of money on their operation.
You can fiddle with the above variables to develop different scenarios.
Once you know the key components and variables, then you can tweak them to develop different scenarios, whether they are for stop hunting or global macro scenarios, etc.
That being said, we are getting into very nitty gritty details.
There isn’t a viable way for me to figure out 100% all of the above stop hunting details. I have never figured out this perfect way and it will never exist.
But I found out that you can make as much money as you want, even if you have imperfect information. You just have to know the key information that matters. Which is usually the macro order flow. You combine that with the knowledge of stops and barriers, and you get much better results.