to get things straight right away: i'm 100% in favor of USING stop losses when trading forex but in my opinion it's a mistake to SET them right away on your account when entering a trade. The reason for this is very simple: some FX brokers will kick you out of trades when being the counterpart of the contract you entered. We experienced this many times over the last years with various brokers.
How do they do this?
They manipulate either the sell or the buy rate in a very smart way. NEVER both rates but only either sell or buy, therefore increasing the sell-buy spread considerably for a short moment or a few seconds to kick you out of your contract – and not only you! Many traders. I assume that several brokers make a lot of money doing so.
Let’s have a look at an example:
We entered AUDNZD long at 1.1040 and set a 60 pip S/L at 1.0980. a usual sell-buy spread for this pair is somewhere between 2-5 pips during normal trading hours. Well, the quote went down to 1.1005 sell rate and we still felt comfortable with 25 pips remaining. 2 minutes later we were stopped out and the pair still quoted at 1.1005. only the daily low had jumped to 1.0975 within a second IN ORDER TO trigger stop losses.
We did watch the screen during these 2 minutes and nothing happened but the change in days low and a one second jump to 1.0975 of the sell rate. It jumped back to normal immediately afterwards.
On no daily chart of any FX broker worldwide this jump could be found since it basically never happened and the buy rate never changed. However, it happened on the accounts and stop losses between 1.1005 and 1.0975 were triggered and traders kicked out of their contracts.
Please make sure to understand that in this example the BUY rate remained stable around 1.1008 – 1.1010. only the SELL price decreased and shortly caused a 30 pip sell-buy spread for a short moment. This is done for triggering stop losses in trades where the broker is the counterpart. Exactly the opposite is true for short contracts with S/L being triggered by a manipulated high.: the SELL price remains stable and the BUY price jumps for a moment to trigger the upper SLs.
Important to understand:
No exit or limit orders are affected by that practice since a short limit is triggered by the BUY quote and a LONG limit by the sell price. Both remained stable in the examples above! So NO TRADER PROFITS from this practice – only the broker. Needless to say that these jumps and S/L triggers yield a lot of risk free money for the broker. Please understand that I’m not going to name any brokers in this context but you can check daily highs and lows on any pairs at any broker yourself. Just make sure that the time periods you compare are the same – in other words: watch out for time zones. You’ll be stunned by the differences even among large FX brokers. Especially when checking side pairs. Which AUDNZD isn’t – it’s among the top 10 most traded.
Avoid the ones with the lowest lows and the highest highs when using S/Ls. You won’t profit from these extreme values with your limit or exit orders. Extreme values are due to higher spreads which doesn’t help you at all.
To be trading on the secure side simply don’t use preset stop losses at all when you’re at the computer. Set the S/L in your mind and exit the contract when it’s reached. This way manipulated low/highs won’t hurt you since they bounce back immediately. You won’t even notice them.
Another solution would be a price alert. Set the alert 5pips away from your S/L. when you receive it enter your account and check what’s going on – real price change or manipulated short term jump.
Then take action.
Of course these practices don’t occur on every S/L you set and not on every trade where the broker is your counterpart. But they do occur many times when the quote is getting near your S/L. please notice that I’m NOT saying that brokers are manipulating market prices or quoting wrong ones. What I’m saying is that SOME OF THEM have a habit of sometimes quoting very mysterious high and lows.
Well – I hope that this article will be of some help to a few traders out there and I wish all of you a lot of trading success.