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  #70  
Old Jan 13, 2011 9:28pm
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I've been following this thread with interest so maybe now is a good time to contribute.

Firstly, thanks Darkstar, your point about disequilibrium is very close to what I've been pondering for a while, particularly how price reacts to areas of lower and higher liquidity and how one might predict the locations of those areas.

Take a look at this chart, it is the H1 EURUSD showing today's action. I've marked up some order flow as I see it, which is probably wrong, but hopefully good for provoking discussion.

As I have learned, Market orders (stops) consume liquidity and limit orders provide liquidity. Using my basic and incomplete understanding of order flow, I have indicated the location of probable stop and limit orders (liquidity consumption and provision) based upon basic support/resistance TA. I also marked up two areas that I believe indicate a more extreme lack of liquidity that I have labeled "Liquidity Void".

Considering price change and price discovery dynamics, it is interesting what price did when it got to these so-called voids - it passed straight on through, quite rapidly. First, price passed through the area of the stops, which were consuming liquidity, and then proceeded directly to the next area of liquidity, represented by the limit orders.

Now my view of things here could be all wet, so what do you guys think?
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  #98  
Old Jan 15, 2011 10:39am
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I think that the term "stop hunting" is somewhat of a misnomer. I seriously doubt that the "big guys" go around thinking "Hey, look over there, stops! Let's go take money from those foolish traders." Instead, I think the scenario is that big guys have made a decision to get long or short in a big way and need the orders of us uninformed little guys to fill their own, often in the opposite direction. So while the big guys do "hunt" our stops to fill their own orders, the "hunt" is not their primary motivation. This is not something new that I've discovered, but read it here on FF and other places.

I believe the big players use Fundamental Analysis, possibly in addition to TA, to make their determination that now is the time to get long or short in a particular currency. So they use TA, order books and an awareness of trader psychology to determine where the majority of us small fry have placed our protective stops, entry stops and limit orders and then they push price in that direction. They use smaller orders, probably losing a little on those small positions just to get the Bid/Ask to move over to where our orders are sitting. Then the process of filling their larger positions takes some time, doing so in smaller chunks, so price has to mill around a bit until they are filled. They are now ready for the move in their intended direction, so they use similar tactics to get it going.

This kind of "stop hunting" would explain why key patterns that we all look for often work AND often fail. It all depends on if the pattern is in the direction that the big guys are looking to go. So a range-bound breakout to the south fails because the big guys want price to head north. They fool around with price to get to the sell orders on the south side of the range because those shorts are needed to fill their much larger long orders. A fake-out ensues, trapping all of us who were looking for that breakout to the south and entered too soon. The final move back north is then empowered by our protective stops that are set inside or to the top of the range. The question is, who is selling into our protective stops at the top of the range? Not the big guys - they want price to go higher and they are holding onto their longs. It must be other uninformed small fry who think price is going to bounce back south and so have limit/stop sell orders at the top of the range - they got run over by the north-bound train and never even knew what hit them.

One other point - I suspect the big guys are not always aware of what other big guys are thinking. So they have to push price around to test areas to see if other big guys are thinking opposite to them. If the tests succeed, then they have learned that most of the big guys are in agreement. Those tests can look very much like stop-hunts.

Once price is moving in the intended direction, liquidity pools and voids determine how long price hangs around a particular area. I suspect testing resumes in the liquidity pools - the big guy has to know that the other biggies are still onboard.

Note: All of this is conjecture on my part based upon what I have read here and other places and also on my own thinking through of the causes of price movement.
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  #187  
Old Jan 19, 2011 8:41am
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Lightbulb Light bulb: on

Well, the bulb finally switched on for me, thanks to many excellent posts in this thread. Stop hunting, indeed! I'll say nothing more than thanks!
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  #189  
Old Jan 19, 2011 9:29am
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Quote:
Originally Posted by auxesis View Post
Just spinning the wheels in my dimly lit noggin'

In the example (modifying DS's first pic) sitting just below current price is a block of short market orders. I'm called to fill a very large "long" order, the customer wants a "specific price". What price do I quote, knowing as soon as I star to fill price will rise. What can I do to give myself a better fill? What happens to the marketfield? what's it going to look like?

Can I spot this activity in real time to take advantage? What information do I need to know beforehand?

fwiw
If I understand things correctly, you need to identify the currently perceived fundamental value, then recognize the false move you have described which baits all the uninformed retail traders, and then trade back in the direction of the fundamental value. All of this can be seen on a naked price chart.
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  #245  
Old Jan 20, 2011 11:37am
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The way I see it, the most interesting part of Darkstar's picture is the area I've highlighted with the blue rectangle. That is the liquidity vacuum created by the shift lower in price - there are no (or few) remaining orders there. If large buy orders start coming in, price should pass through that area very quickly searching for liquidity higher up. I would want to be in a position to capture that move should it happen.

Which I suppose is visualized in your third picture, Scott.


Quote:
Originally Posted by scott89 View Post
Am I the only one that looks at it this way?
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