A little bit more on the contentious subject of stops.

As traders, we all want out stops treated with kid gloves. In a perfect world, we want the forex gods to “hold us in” a position when the market overshoots or stops us out by a few pips only to reverse back in the direction of our trade. We also want our stops executed precisely where we place them when the market gaps through a level and runs away from us….

Unfortunately in this age of machines, we can’t have it both ways. The process has become clinical and without discretion.

So now we have a situation where we demand guaranteed fills on stops but scream bloody murder when they are triggered at an extreme end of a range, claiming the “bastards ran my stop”.

Here’s how the process works: If a market maker has a bunch of stops just above the market, to protect himself from the possibility that the market runs quickly through that level (because if he has stops, odds are his competitors have them too…) he has to buy ahead of the stops so he can fill the orders at the appropriate level. If he does not, he opens himself up to the risk that he has to chance the market higher.

“Front-running” stops is not without risks, however. Traders who buy in anticipation of filling stops are always long at the top of the market and short at the bottoms. If the market does not reach the stop-loss orders, the market-maker takes a beating.

So it’s a zero sum game, folks. Sometimes you benefit from the fact that your stop was not tripped and the market-maker has to bailout of the position taken in anticipation of filling stops, moving the market in your direction. Sometimes you get stopped out at the highs or the lows…

A little microcosm of life itself, no? Somedays luck, somedays good…