How I use TradingFloor's online FX Open Orders tool for trading

The most common complaint I’ve heard over the many years that I have been trading forex is that large banks, Tier 1 names etc have a habit of going “stop hunting”, deliberately  ramping markets higher/lower in accordance with where the nearest stop loss orders are residing in an attempt to clean these orders out, make some quick cash on sizeable flow and just as quickly revert to where the market was trading (usually 30 or so points) prior to the hunt. 

Now just because this is a complaint mainly echoed within the retail space does not make it any less a legitimate claim or any less factual. This has indeed happened and continues to do so, most notably in thin markets, the likes of which are seen for instance over the European summer while most are away sunning themselves rather than staring at screens.

How the punters make it possible

The main reason that such behaviour is allowed to happen and proves successful so often is that most punters will place orders at what are fairly obvious levels. That is, roughly 10 or so points either side of resistance/support levels. Given that we’re all looking at the same charts and there is no shortage of “guru’s” out there only too happy to point out the obvious (for those that haven’t already seen it themselves) this in itself becomes a self fulfilling prophecy and orders begin to amass in and around these levels.

TradingFloor.com's FX Open Orders tool, however allows - in a very simple and graphical way - the ability to get a real time sense of where these orders lie. In terms of my own use of this particular tool, well it’s relatively simple (or at least to me), I use it mainly on a weekly basis and as part of my usual Sunday afternoon ritual. Wherein I take stock of the week that has just been, studying charts and price patterns, and looking likewise for the week ahead, taking into account upcoming data releases and likely developments based on what the various charts and landscape look like. As such, when determining whether a trade exists and equally so if it indeed does, where to place related orders, chief amongst which would be the all important stop loss.

Clusters show potential targets for stop hunters

In an ideal scenario the risk reward for any trade would be 1:3, however in reality this usually averages out at about 1:2.25 and is mainly a function of trying to place stops away from clusters of other obvious stops, as referred to above. Using the tool gives a visual representation of exactly where these clusters lie and thus which levels would be potential targets for stop hunters in thin markets.

The next logical conclusion is to place stops away from these clusters so as to avoid being one of the herd that gets chopped down by the hunters when they come calling. Therein the desired and ideal risk reward ratio becomes diminished, however if it means being safe from rampant and unrelated market moves, then why not.

Using this tool in conjunction with the FX Open Positions tool, I can also get a very good overview and understanding of positioning and not just where orders lie, thus giving me a far more rounded picture of how the market will likely interpret any headline bombs or potential black swan events. In reference to the open orders functionality, the ability to drill down per currency and look at distinct levels for orders and which side of the market they are makes this a highly valuable weapon in the arsenal as it gives a far more rounded picture than just the aggregate order book. 

This article is part of a series about how I use TradingFloor.com's free online tools for forex trading. Become a TradingFloor.com member (it's free) and follow "How To Use The Trading Tools" to get notifcations of new articles sent to your mailbox.