I just have a quick followup, regarding the tripping of stops and I hope I have not misunderstood your teachings/readings but my understanding is;
– In regards to big players establishing a long position they may push against current sentiment by executing short MO’s to trip the stops and get a better entry. however, they would only trip these if the current sentiment was still neutral or only slightly bullish. They would be establishing this long position because they are betting on a price rise in the future (there version of scenario analysis). It may be suicide for them to try and trip lower stops if sentiment is ultra bullish, they may be better off suffering the slippage. Its all a risk reward thought process for them. So thats why we focus on also having the macro/sentiment/news in our favor when expecting stops to be tripped rather than crossing our fingers for big players to hunt the stops.
Assuming the big players are smart, they will want to follow the news/sent/fund/macro order flow. Because if they go to execute a big order, regardless of whether that order gets slipped or not on the entry, when they go to exit the trade, the market has to have gone in their favor, and they need liquidity to get out. The best liquidity to get out comes from other news/sent/fund/macro players that are late to picking up the new scenario or are on the wrong side of the market and need to get out. The second best liquidity comes from the stops getting tripped, and various other technical traders like moving averages, chart patterns, price patterns, etc. The best liquidity to get in and out comes in the form of the news/sent/fund/macro players.
In regards to the tripping of stops that help out the big players, there are roughly two types of trades for them. I am assuming they want to establish a long position.
There is the intraday scalping and volatility trade. This is where the big player has a market view for the day, wants to place a day trade to profit a bit, but they don’t see an opportunity for the size they want at the current market price, but believe that if they can trip some stops, and fade them, they can get in at a better price of 10-30 pips better, plus with the short covering from the false breakout, the market may spike higher, so that stop hunting action creates an opportunity for them, creates intraday volatility, that previously did not and would not exist.
The second type is when they want to fade the stops to establish a position for a swing trade or a longer term trade that lasts several days or several weeks. Let’s say the market is consolidating on the daily charts. A big hedge fund believes a breakout to the topside is going to happen and could continue for 2-3 weeks. They want to put in a big position.
- The worst way for them is to use buy stops above the consolidation highs, because they can get slippage on them (although sometimes it is still worth it to buy on fresh breakouts and buy the top tic of the breakout).
- The second best way (which sometimes has to be used –depending on the information flow) is to buy a retracement in the middle of the range with a combo of market/limit orders.
- The third best way (which sometimes has to be used – depending on the information flow) is to buy at the consolidation chart support level with combo of market/limit orders
- The best way (which isn’t always available) is to trip the downside stops, then buy the market with a combo of market and limit orders. That way they can create a false breakout, buy the dip, and if the market starts to rally again with news/sent/fund/macro players, it can rise naturally, with also some added short covering to juice the rally.
It is dumb for them to fight the news/sent/fund/macro order flow. Because let’s say the news/sent/fund/macro is bullish, and they go try to trip the downside stops then:
- The would probably have to put on a bigger short position to trip the downside stops as they need to go through more standing limit bid orders from the news/sent/fund/macro players
- The chances of a stop cascade, or sent/psych shift or big tripping of stops is lower because there will be bargain hunting bids in the form of more news/sent/fund/macro players
Thus, it is a poor trade from a reward to risk ratio and potential win rate to fight the news/sent/fund/macro order flow.
Now obviously, no market player can get the macro correct every time. That is what makes the market – people differ on the interpretation of the information flow. People differ on things – which creates the battle of scenarios that occurs in the market.
A piece of information may come out and various news/sent/fund/macro traders can interpret it differently:
- One person says: “I will place buy stops above the high”
- Second person says: “I will buy a small retracement off the highs”
- Third person says: “I will buy on a test of key support”
- Fourth person says: “I will only buy a deeper retracement on a tripping of some key downside stops”
- Fifth person says: “The situation is too confusing, so I will stay out”
- Sixth person says: “I want to short it at the market”
- Seventh person says: “I want to short it only by fading topside stops”
- Eighth person says: “I will short it only if it makes new lows”
As you can see, a piece of information can be interpreted in so many different ways. But market players do not just differ on how to interpret information, they also differ on what information is important! As Victor Sperandeo said in his book Trader Vic: Methods of a Wall Street Master:
The idea that everyone receives all significant information simultaneously is absurd because everyone doesn’t agree on what is ‘significant’… Even if everyone did receive exactly the same information simultaneously, they would respond to it according to their own particular circumstances and preferences. If everyone knew exactly the same things and responded the same way, then there would be no market
This is the macro model and battle of scenarios at work. It is up to you to interpret the information flow correctly to figure out the best macro model and timing to choose.
And the above was just for the market players sitting on the sidelines waiting to establish fresh positions. There is also how the people who respond to the information who are stuck in losing positions. I understand it can get complicated to separate the two and have 8 different choices for the people who could put on fresh positions and eight different choices for the people who can bail out of wrong positions. I believe it was important in the Mastery Course to present to you the theory and structure behind my strategies. So that just in case you don’t fully agree with my strategies or tactics, you understand the theory and principles behind them, so you can go and build any type of system or strategy you want.
But it doesn’t have to be that complicated. When you get to the practical application you just combine them – into what causes the volatility. You simplify it into the intraday volatility, ODVE, MDMM, and GM movements. That’s all.