One of the main techniques of order flow analysis is predicting when, and more importantly where, a stop hunt is likely to occur, most order flow traders do this based on the experience they have trading the forex markets, the problem these traders have though is they can not be certain where these stops losses are.
Now I know what your thinking, traders on Oanda only represent a small portion of the overall forex market. If you have spent any length of time studying order flow concepts then you may be familiar with the stop hunting that takes place in the forex market.
They reason they do this is due to liquidity. The banks want to be able to buy or sell large amounts of currency with the smallest possible impact upon the market, a large collection of stop losses found at certain prices allow them to do this.
This is a graph of all the pending orders currently placed by the traders using Oanda as their broker, notice the graph is split into two sections: The amount of sell orders is shown by bars, the orange-colored bars are sell orders which are above the current market price, the bars below which are colored blue are sell orders below the current price.
Buy orders which have been placed above the current market price seen on the right hand side of the graph are also colored orange, whereas the buy orders below the current price are colored blue. If you scroll with your cursor over the candles whilst looking at the order graph you can see how the open orders change overtime. In addition to this I believe this is the first time someone has devised a stop hunt method which is based on facts, many of the standard teachings of stop hunts focuses on understanding where people are likely to place their stops then watching price action around these points for some sort of entry.
The first step is to wait for a large amount of stops to gather on the order book. If the amount of stops is at or over 0. If the bars fail to be at least 0. When you do see that stops have accumulated over 0. You can see from the open order graph that a lot of stops were found from the The red rectangle marks the area in which these stops were found, if this was happening in real-time you would have had this level pre-marked before the market reached it.
As you can see the market moves up strongly into these buy stops then almost instantly moves lower. Entering into the trade requires us to look for the normal price action setups we use such as the pin bar and engulfing candle. One thing to keep in mind is make sure you do not use pending orders when trying to trade these stop runs. I know from experience using pending orders to trade stop hunts more often than not results in losing trades. When I initially developed this strategy I only traded it using pending orders and although there were times when the trades I took worked out great, there were many times when it resulted in me losing money, so I decided to try to trade them with a confirmation entry, I found this to be far superior to using pending orders, typically when I used a confirmation entry I made money on trades I would have lost money on had I been using a pending order.
One of the structures you may see when the market runs into stops is a pin bar. This pin bar , whilst looking exactly the same as a normal pin bar differs as the wick is created from the market running into the stops, not the typical buying or selling we see on a pin bar setup.
Looking at the order graph we can see there is some sell stops between the 1. The first thing we notice is the stops were found below a recent low which is common place for people to place stops anyway, the second thing is when the market hits the stops it produces a pin bar candle. This is what you should be doing when looking for an entry into a stop hunt trade.
Watch the market on the lower time frames to see if you can find a typical price action signal i. I observed there were sell stops around the 1. We get a pin bar. Although this pin does not met our usual criteria i. Stop hunts are one of the few setups I trade with a bigger position size, this is due to them offering high probability trades.
Things like pin bars and engulfing candles while also high probability setups are not as certain to work as stop hunts are. This might be a silly question but I am trying to understand this graph, is the sell or buy limit orders and the stop loss grouped together? The bottom left quadrant shows the sell stops from traders who have gone long and some pending orders to sell, the top left quadrant shows take profit orders from traders who are currently short and a selection of pending orders to sell.
On the other side of the graph in the top right corner we have buy stops from traders who have sold short, a small collection of these will be pending orders to buy from traders who are not in the market yet, the bottom right quadrant is mainly made up of pending orders to buy and take profit orders from traders who are already short in the market. When it comes to trading the stop hunts you only need to focus on the bottom left quadrant and the top right quadrant these are where any stop losses placed by the traders will be.
Thank you for the response, and yes it is clear to me now. I have recently decided to only start trading candle patterns mostly pinbars on the day time frame and happen to stumble upon your orderbook method which I am going to try and incoporate with it. Would this work if i trade it with diff broker. Is the probability of reversal is higher if the stops is more than 0. Say I would want to modify this method little bit ie instead of 0. Thanks for the article.
Now i know how the market makers operate, no one could explain to me clearly and in greater details like you did. Thank you for this article, I fell a victim of stop hunt myself in some occasions and I was looking on how that happened… I find the article very useful indeed.
Hey there, this is some great insight to how the institutions use stop hunts against us! I was wondering whether you could make a short video on how to use this tool.
If you follow this link Joe it will take you to an article I made which will give you a full breakdown of how to use the orderbook. Have a good day. Notify me of follow-up comments by email. Notify me of new posts by email. Send Me the Download Link. Hi This might be a silly question but I am trying to understand this graph, is the sell or buy limit orders and the stop loss grouped together?
Hello Len, The bottom left quadrant shows the sell stops from traders who have gone long and some pending orders to sell, the top left quadrant shows take profit orders from traders who are currently short and a selection of pending orders to sell. Hi Thank you for the response, and yes it is clear to me now. Thanks for all the great articles on here though, very insightfull.
Could I kindly ask you to share with me the remaining types of stop runs? Many Thanks lbessadi hotmail. Thank you for sharing this method, thank you. Please kindly share the other methods too. Reply Cancel reply Notify me of follow-up comments by email.
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