Using Oanda’s Orderbook To Trade Stop Hunts

In Today’s Article You’ll Learn:

  • What Are Stop Hunts And Why Do They Work So Well
  • How To Read Oanda’s Order Book Graph
  • How You Can Use The Order-Graph To Find Where Lots Of Stop Losses Are Located
  • Using Price Action Patterns As An Entry Into Stop Hunt Trades
  • How To Trade Stop Hunts

What Is Stop Hunting ?

 

Stop hunts are a common sight in the forex market provided you know what to look for.

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.

Today I’m going to show you how to trade stop hunts without any sort guessing, we’re going to use a little know tool found on Oanda to locate where traders have placed their stop losses in the market and formulate a trading strategy based off of that information.

Now I know what your thinking, traders on Oanda only represent a small portion of the overall forex market. This is completely correct, but as we all constantly get reminded this a market where 90% of traders lose money, virtually all of these traders make the same kinds of decisions as to where they are going to buy or sell or in our case, place their stop-loss.

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. The basic idea is the market maker’s ( the people in charge of the markets ) will seek to drive the market price up into places where a lot of stop-losses have been placed in order to easily buy or sell large quantities of currency.

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.

 

Understanding The Order book

 

image of oanda order book

If this is your first time seeing the order book then I understand you might be little overwhelmed, don’t worry though, it’s not that hard to figure out, I’ll try to explain everything as clearly and easily as possible.

In the image above you can see two graphs, for now the one we’re interested in is the one on the far left. 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: sell on the left side and buy on the right side.

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.

On the right hand side of the image you’ll notice a small candlestick chart.

image of small candlestick chart

If you scroll with your cursor over the candles whilst looking at the order graph you can see how the open orders change overtime.

One of the limitations of using this strategy which I should mention is it should only be used on the EUR/USD and USD/JPY currencies.

The other currencies are simply not traded enough by the users of Oanda for us to see decent data about the open orders, it seems like most of the traders using Oanda stick to trading the EUR/USD and USD/JPY  currencies.

Go to the link below to open the order graph.

http://fxtrade.oanda.co.uk/analysis/forex-order-book#USD/JPY

 

How To Trade Stop Hunts

 

Stop hunts tend to be high probability setups in the sense that they don’t happen very often and the reasons for them to happen in the first place are based upon sound principles of how traders think and make decisions.

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.

While I agree this is a very valid method for making money it’s still dependent of how well you can read the psychology of the traders in the market, which can be tough for many traders, the method I’m presenting here is mechanical in terms knowing where the stops are located within the market, no assumptions are made, the stops are either are there or not there.

Whilst our method of knowing where stops are is mechanical, our entry is based on discretion.

This means that it may take you a while to become good at trading this method.

What I propose you do to begin with is just observe how the market reacts when it hits the stops you’ve marked on your charts, try to look for anything that’s consistent in each stop hunt you observe.

 

Step 1

 

The first step is to wait for a large amount of stops to gather on the order book.

If you look at the bottom or the open orders graph you’ll see how many open orders there are in the market is based on a percentage.

This percentage scale is what we’ll use to determine if enough stops have been placed for us to consider if a stop hunt has the potential to be a good trading opportunity for us.

If the amount of stops is at or over 0.5% its valid for a stop hunt trading opportunity.

image of open orders on USD/JPY

The black dots I’ve marked on the graph indicate all the instances where enough stops were placed in order for you to consider taking a stop run trade.

If the bars fail to be at least 0.5% it means that not enough stops have been placed for us to take it as a setup.

When you do see that stops have accumulated over 0.5% what I would advise you to do is mark the price level on your charts of where the stops are located.

You can see from the open order graph that a lot of stops were found from the 121.40 to 121.50  levels.

image of stop hunt on USD/JPY

I’ve marked this level on the chart above.

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.

The Entry

 

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.

So What Do I Look For?

 

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.

This example below is from a recent trade I took a few weeks ago.

Aviary Photo_130887061822295938

Looking at the order graph we can see there is some sell stops between the 1.1200 level to the 1.1225 level.

Image of stop hunt on 1 hour chart of EUR/USD

Here’s what happened when the market hit the sell stops.

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 our entry into the trade, the reasons were trading this pin haven’t got anything do with support or resistance or supply and demand, but with the fact that the market makers have driven price into the sell stops to offload large buy trades for the banks, what this tells us is price has a very high chance of going up from here.

We trade this pin bar the same way we trade all other pin bar’s, the stop goes below the low and the entry is when the candle closes on whatever time frame we’re observing the pin on.

Another example:

image of stop huunt seen on 5minute chart of USD/JPY

The pin bar we see here is taken from the USD/JPY example we looked at earlier.

Only difference is we’re looking at the entry into the stops on the 5 minute chart, when the market hits the buy stops it results in a pin bar being created, the amount of money your would have had to risk trading this pin would be very low meaning you could have traded it with higher leverage.

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.e pin bar or engulfing candle, if you see one appear after the market has hit the stops, you place your trade with the same rules you would use trading a normal pin bar or engulfing candle.

Aviary Photo_130924213540413904

This was a trade on EUR/USD

I observed there were sell stops around the 1.1170 level, you can see from the graph theses stops were nearly 1.0% of all traders on Oanda this may not sound like a lot but keep in mind Oanda is one of the largest online brokerages in the world with traders trading on many different markets not just forex so to have 1% of all traders stop losses found on one currency is a big deal.

Aviary Photo_130886089814047119

Look what happened when the market hit the stops.

We get a pin bar. Although this pin does not met our usual criteria i.e “closes into the previous candle” because this is a stop run pin these things don’t matter, our reasons for taking the trade are not based on the pin itself but on whats causing the pin in the first place.

Notice how the following candles do not break the low of the pin, this happens because the professional traders who initiated the stop hunt to begin with want the market to move up, they do not want the market to break the low as it might make people believe the down move is continuing, jeopardizing the buy position they’ve just taken in the market.

Summary

 

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.

In this article I’ve only shown you one type of stop run, there happens to be a few more which you’ll eventually come across provided you spend a lot of time trading these like I have, the main idea behind this article was to give people who have been trading the markets for long time with a lack of success a strategy which actually works and is based on real things that happen in the market everyday.

Because I know its easy to be discouraged if you have not been able to make consistent money in the markets for a long time, this strategy will certainly make you money if you spend enough time properly learning how the market interacts with the stop losses found on Oanda’s order book interface.

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15 comments

  1. Len

    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? so say on the open order graph top left quadrant, the bars will represent a sell limit order and or stop loss of the orders. and the bottom left quadrant will be profit target orders for sell positions? and vice versa for the right hand buy side of the graph?

    any help would be much appreciated.
    cheers

    • ForexMentorOnline
      Author

      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.

      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.

      If you need any more clarification let me know I’m here to help.

  2. Len

    Hi

    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.

    Thanks for all the great articles on here though, very insightfull.

  3. Christophe De Laet

    When price is approaching a price level, let’s say a resistance line, can we then assume that there will be people
    a) Speculating on a break and putting buy orders above the line and their stop-losses below the line

    and

    b) other people speculating on a bounce downward from resistance and having put their sell orders on the resistance line with the stop-losses above resistance line

    and then when the market either moves down or up, that there will always be people having their stops getting hit?

    • ForexMentorOnline
      Author

      Hi Proff

      I’ll put the whole article in a text document and send it you at some point during the weekend.

    • ForexMentorOnline
      Author

      Hi Proff

      I’ll put the whole article in a text document and send it you at some point during the weekend.

  4. Sufian

    Would this work if i trade it with diff broker. I.e i use oanda order book to identify stops, and ill trade it in other broker with adjusted price

    • ForexMentorOnline
      Author

      Yes of course Suffian, you can use this method with any broker you want it’s not just exclusive to Oanda.

  5. SUfian

    Is the probability of reversal is higher if the stops is more than 0.5%? Say I would want to modify this method little bit ie instead of 0.5%, I am looking for stops that is 1.0%.

    • ForexMentorOnline
      Author

      Yes the stop runs do tend to be more successful when the percentage of stops on Oanda’s order-graph is over 1.0%.

  6. Robix

    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. Thnx 😉

  7. Sami Bessadi

    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.

    Could I kindly ask you to share with me the remaining types of stop runs? if its ok?

    Many Thanks

    lbessadi@hotmail.com

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