Stop hunting and Brokers

[NickB]

Why do brokers make money when you lose money?

I get a lot of emails asking me this question so I thought I would answer it on the forum.

First of all it is not a myth it is true!

YES, brokers loses when you win!

YES, brokers win when you lose!

I do not need to tell you that 95% of all traders end up losing overall. Those are some crazy stats and armed with those stats a broker is more than happy to take on losing and winning trades. Why? because the odds are in their favor, the fact that newbies lose is guaranteed.

The question is how do they win when you lose?

You will probably be shocked when you read the next part. When you take a trade your brokers does not put your money through to the interbank market. The money you trade goes to them and stops there. As a retail trader using a market maker broker you are not really trading the Forex market. You are trading an imaginary market created by the broker based on interbank prices market prices.

To simplify things, when you place a position they get the money and hold it in their pocket. If you make profit they pull out your money plus some of their money and give it back to you. When you lose they pull out your money minus what you lost and give it back to you, this means they pocket all your losses. To improve their chances of keeping some of your money they can manipulate prices, remember they create the market! Manipulation of prices is usually done to target large groups of stop losses. In targeting those stop losses the broker pockets all the money that their customer lose.

If you manage to break free from the pack and start making real profit consistently they then start putting your orders through to the market. This way your winning or losing does not hurt or benefit them. If they keep traders that consistently win on the normal system they start to incur losses and they do not want that.

EDIT: This is only true with market makers ECN's work differently.

Whats the deal with stop hunting?

Since the broker is creating the market they can manipulate prices. They have limits if they push it 100 pips away from true interbank prices they get in trouble but they can easily push it 10 pips further up or down. I have seen up to 20 pips manipulation from true interbank prices.

The thing you need to know though is they do not target your account specifically they target large groups of stop losses.

The question is how do you counter stop hunting?

- The easiest way is to go with an ECN who handles trades differently and does not profit from your losses.

- DO NOT SET STOPS IF YOU ARE SEATED AT YOUR COMPUTER: Stops are only for when you are away from your computer. If you are sitting at it set an alarm 10 pips above the area you would set a stop at. When the alarm rings you know its time to get out or possibly stay in if it looks like it is only stop hunting.

- When you do set stops do not set them in places where every other retail trader in the world is setting them. Remember brokers target large groups. Avoid rounded numbers like 00, 50. People tend to place stops at these levels so if you avoid these levels you could save yourself being hunted.

Avoiding stop hunting is common sense. People should stop b*tching about it and start protecting themselves.

A broker does not see your face, behind their friendly exterior all they want to do is make money. A broker needs a minimum of $5 million in reserves to keep running, on top of that they need to pay their employees. This costs money, we are talking hundreds of millions a year. They can not make that kind of money by playing nice! If all brokers treated retail traders fairly they would not exist.

Stop hunting is old news, stop traders should crying about. Time spent b*tching is time wasted, instead of b*tching look at way to protect yourself from hunting!