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what does "running stops" mean?

  • #1
  • First Post: Aug 22, 2006 2:24pm Aug 22, 2006 2:24pm
Hi,

I am a bit confused on this issue... I know it is something obvious that I am missing. But could someone explain for me why hedge funds or banks "run stops"?

for instance, I think it was the Monday Asian session where the EURUSD just kept on appreciating and I was reading that this was from a bank "running stops".. at least I think that is what I read.

anyhow, why do institutions do this? if they make the price go higher, shouldn't hitting people's stops give more resistance, making it harder (not easier) for the price to appreciate... someone please set me straight.

on the other hand, I have no problem seeing how it would be advantageous for a broker to spike stops and pocket the cash. I am just confused about how moving the price through stop levels benefits the institution that is doing it.

Does it make it easier for the bank to do a u-turn and short the pair after running it up?
  • #2
  • Aug 22, 2006 2:53pm Aug 22, 2006 2:53pm
Quoting ycomp
Hi,

I am a bit confused on this issue... I know it is something obvious that I am missing. But could someone explain for me why hedge funds or banks "run stops"?

for instance, I think it was the Monday Asian session where the EURUSD just kept on appreciating and I was reading that this was from a bank "running stops".. at least I think that is what I read.

anyhow, why do institutions do this? if they make the price go higher, shouldn't hitting people's stops give more resistance, making it harder (not easier) for the price to appreciate... someone please set me straight.

on the other hand, I have no problem seeing how it would be advantageous for a broker to spike stops and pocket the cash. I am just confused about how moving the price through stop levels benefits the institution that is doing it.

Does it make it easier for the bank to do a u-turn and short the pair after running it up?
In a word: Liquidity

Banks and hedgefunds trade $100mil+ positions and it is usually impossible to drop that much on a trade without moving the price. They tend to accumulate securities on the run up and then dump them into the stops. If the stops weren't there, liquidating those positions would drive the price down and erase any profits they accumulated. I say up, but it works just as well on the short side...
  • #3
  • Aug 22, 2006 3:02pm Aug 22, 2006 3:02pm
I see... thanks. I knew I was missing something obvious.

Quoting Darkstar
In a word: Liquidity

Banks and hedgefunds trade $100mil+ positions and it is usually impossible to drop that much on a trade without moving the price. They tend to accumulate securities on the run up and then dump them into the stops. If the stops weren't there, liquidating those positions would drive the price down and erase any profits they accumulated. I say up, but it works just as well on the short side...
  • #4
  • Aug 22, 2006 3:09pm Aug 22, 2006 3:09pm
First you have to remember that the Funds are not Trading with a Retail Brker who is taking the Other Side.
They are trading through CME where there have to be Traders willing to take the otherside or the price wouldn't move.


Numbers used are for example only.
Spec Trader says...

Sell Eur/Usd with Stop Loss @ 1.2850 {~ 50 Pip Risk from current level}
[In other words Buy it back from someone willing to Sell if gets as high as 1.2850]

Fund Manager says...
Sell Eur/Usd between 1.2800 and 1.2900 {100 pip sell zone} because we feel it is headed for 1.2650

Eur/Usd gets to 1.2840...
Spec Trader sitting worried and hoping.

Fund Manager sitting saying "If we can get it to 1.2850, we can sell a bunch more to close all the Specs out. Moving our Average Entry to 1.2825 less the cost of "Running the Stops"."

To help understand this you have to remember that the Big Guys are trading 100 lots as chickfeed. So... for them to be short 500 lots at 1.2800 and be buying in lots of 10 from 1.2840 to 1.2850 is nothing for them.
They will end up Short 1000 lots from an average of 1.2825.

Also known as a "Short Squeeze" or "Bull Trap" depending on how it plays out.
  • #5
  • Edited 3:29pm Aug 22, 2006 3:16pm | Edited 3:29pm
In other words, we big boys are takin' out all the suckas that are sittin' in the corner with their thumbs in they mouth all worried that they trade is gonna get stopped out.

Then I come along and, BLAM take those stops out and let the momentum take off as I start collectin' chedda on the way down...

What! what! :
Mr. Trend
  • #6
  • Aug 22, 2006 3:28pm Aug 22, 2006 3:28pm
Mr. Trend puts it quite harsh, yet it could not be anymore realisitc than that.
This is exactly why trading in the gray areas against the trend are the most dangerous ones for the small spec.
"Look Left Think Right"
  • #7
  • Aug 22, 2006 4:03pm Aug 22, 2006 4:03pm
Stop running can be done by FX brokers looking for stops and adding spikes that will trigger those - the trader loses and the broker wins. One trader said he had a 130 pip stop on a 4hr chart that his broker took out, and he was very unhappy about it. Stop settings are available to view like trades, and some traders will use these stops as pivot points to make their trades. That is why placing stops on a broker's server can present problems. Turtles trading futures had a policy that their stops were kept on their PCs and were never placed on the broker's server to prevent this.
  • #8
  • Aug 22, 2006 4:50pm Aug 22, 2006 4:50pm
Open a 4 hour GBP/USD chart or any chart of your choice, put a horizontal line at every even number. Put a horizontal line 15 pips above and below each even number. You will notice that the price either turns at these points or the price blast thru these points. There you have it, stop running in action.
  • #9
  • Aug 22, 2006 5:27pm Aug 22, 2006 5:27pm
Quoting Stogie
Open a 4 hour GBP/USD chart or any chart of your choice, put a horizontal line at every even number. Put a horizontal line 15 pips above and below each even number. You will notice that the price either turns at these points or the price blast thru these points. There you have it, stop running in action.
Actually thats option activity, but your close.
  • #10
  • Aug 22, 2006 6:42pm Aug 22, 2006 6:42pm
All the big-timers,

Do you put hard stop while trading ? Let say.. 50lots and above.
The future depends on what we do in the present.
  • #11
  • Aug 22, 2006 6:48pm Aug 22, 2006 6:48pm
Quote
Funds are not Trading with a Retail Broker who is taking the Other Side. They are trading through CME where there have to be Traders willing to take the other side or the price wouldn't move.
Here is a link to Commitment of Traders charts that comes out every Friday showing big traders, small traders, and commercial traders on a GBP US chart. You can see that commercial traders take the opposite side of big traders. If big traders are winners then commercial traders must be losers.

http://www.freecotcharts.com/charts/BP.htm
  • #12
  • Last Post: Aug 22, 2006 7:15pm Aug 22, 2006 7:15pm
Quoting richx7
Here is a link to Commitment of Traders charts that comes out every Friday showing big traders, small traders, and commercial traders on a GBP US chart. You can see that commercial traders take the opposite side of big traders. If big traders are winners then commercial traders must be losers.

http://www.freecotcharts.com/charts/BP.htm
Actually Rich, that chart shows that Both Commercials AND Large Traders are doing just Fine.

Remember that Commercials {most, not all} will often Take Delivery of the Commodity because they need it for day to day business operations. Thats why there is a steady Decline in the Blue Line as the Price Rises. Commercials are Net Sellers {from their Inventory} as the Price Rises and Net Buyers {to replenish inventory} as the Price Declines.
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