Transcription
In the trading space, especially the ICT-related trading space, there is this widely spread idea, or we can call it a conspiracy theory, that banks somehow hunt for retail traders' stop losses. As humans, we love to believe in conspiracy theories because they give us an easy answer to very complex issues. Our brain is evolutionarily hardwired to believe those stories. It's always easier to have someone or something to blame than to actually look for the truth and search for the rational and logical truth. That is always a much harder and complex task for our mind to do, rather than what it's often presented in these cheap YouTube theories, which mostly leverage emotion instead.
And if it's true that in the day-to-day trading activity, we shouldn't let emotions get in the way of our trades, I think we should do exactly the same in the way we try to comprehend the very complex nature of financial markets. So, over the last year, I've been thoroughly studying this topic of stop hunting. For a long time, I could only find or come up with purely abductive and specious explanations, like, "Hey, there could be stop orders up there, so they want to take those stops to induce traders to buy and close their sell positions so they can take liquidity to fuel the next move." Whatever that means.
But this very simplistic answer only raised up more questions. First of all, who is "they"? Who is pushing the price up to catch some stops? Is it more banks? Are they collaborating, or are they fighting each other because they're competitors? Or are they hedge funds? Who are the actual smart money participants in detail? And are those stops actually retail traders' stop losses? Because retail trading activity only accounts for 5% of the total daily volume. And are we considering retail stop orders on the underlying asset, or also the stops on futures, options, and CFDs? A huge bunch, if not the majority, of retail traders in the world today are using CFDs, and 90% of those stop losses are not even in the interbank market because they're trading against their brokers. So they don't bring any concrete edge or benefit to the smart money participants.
But whoever is making this move, how do they know if there are actually stops there, or how many there are? Do they have access to secret data? Or is it just because there is a previous high, so they guess there's going to be stops out there? How do they know it's worth pushing and pushing and pushing price up by moving millions and millions and millions of dollars just to go up there and catch a bunch of little retail traders' stop losses that they are not even sure are there? I just couldn't wrap my mind around all this.
So, in order to get a deeper and data-backed understanding of this concept that Richard Wyckoff used to call a spring or upthrust, what later in the order flow space was known as a failed auction or a stop run, to what now today is being called inducement, liquidity grab, Judah swing, and a bunch of other fancy terms, in order to understand all this, I had to see those stops being triggered. I had to see those orders, and the only way to see order flow is with order flow. So I bought a data feed, a platform, and started seeing actual order flow in action every single day. And after hundreds and hundreds of stop runs, I finally understood what is really going on behind those moves. And the answer is going to shock you.
And in order to understand it, you have to understand how real order flow works. Because yes, you can call this a bullish price action or bullish order flow, but that's just bullish price action. This is actual bullish order flow. And yes, you can call this an order block without seeing any actual blocks of orders, or you can use real order flow instead and see actual blocks of orders. Fair value gaps are determined by price and volume, which is order flow, but you're just using price action when order flow data can give you a way more accurate and reliable visualization of the imbalances in fair value.
In this channel, I try to debunk some of these myths with data-backed information through order flow. So if you want to know a more accurate version of market mechanics instead of "there is an algorithm which was given to me by God," then you might want to subscribe to the channel. Let's start with understanding how order flow works. So probably you've been told that there are two forces in the market: buyers and sellers. And while this is absolutely true, this is only a partial view of the market because both buyers and sellers can be aggressive buyers or sellers, and passive buyers or sellers. These are passive buyers and passive sellers. These are sell limits and buy limits. Per every level of price, there are orders that are put there, and they are the menu of the market. They are the catalog of the market. I've been explaining this thoroughly in all of the previous videos of this order flow course that you can find down below in the description.
So these are resting orders, orders that are waiting to be filled by aggressive orders. So this is passive. Then there is aggressive orders, or aggressive liquidity. So say someone comes and wants to buy market at the best price, five contracts. He will buy five contracts at the best ask price. So if say five contracts here, that's where he will buy those five contracts. And that's how, through matching algorithms, which are simply algorithms that match supply and demand inside of an exchange, which for most futures contracts is the CME, the Chicago Mercantile Exchange. So once these five are taken, they're taken away from the order book, and this level becomes empty.
So now this is the best bid, this is the best ask, and there is a little spread over here. But sooner enough, this level will repopulate, whether with sell orders or buy orders. And if a new buyer kicks in and wants to buy five more contracts, he will have to buy them at the next level. And say here there are 10 contracts, five of them will be executed. So now there's going to be only five contracts over here, and this little bar will be a bit shorter. So passive liquidity, or resting liquidity, also known as market makers, they are providing liquidity. These are the liquidity providers. Aggressive orders, aka people buying market and selling market, are the consumers of liquidity. So price moves wherever the last aggressive orders have consumed passive liquidity.
So if we had to draw a candle, this would be our candle. We started here. This was the first transaction. The second transaction is here. This is a long candle, a bullish candle, and this is basic market mechanics. Now, let's say we have the high of the day above here. Price has been [ __ ] around a little bit, and now price is just about to break through this high and this high. So the theory behind stop runs is above all of these highs, so-called buy-side liquidity, or some buy stop liquidity. I wouldn't call it buy-side liquidity because above this price, there is yes, buy stops of people who maybe are selling here with a stop above here, or simply of initiative buyers which wants to buy the breakout to take profit higher. So yes, there is actually buy stop liquidity, but not only buy-side liquidity. In every level of price, there is both sides of the liquidity, otherwise there would be no market. Market is made always by both sides. So there's not just buy-side liquidity and sell-side liquidity, there is buy stop liquidity and also sell limit liquidity.
So if it's true that there are buy stops here and buy stops here, we have no way to accurately assess beforehand how many stops are going to be there because the only information that the order book can give us, which is the only kind of reliable information that we can have in the markets because it's super manipulated, but this is the only thing which can give us a fair degree of certainty that an order is there at a specific moment. It's not going to 100% stay there forever because all of these buy limits can be withdrawn and can be canceled, okay? So we don't know if they're going to be there, but less and less we can be sure that there's buy stops there. We can deduce that probably they are there, but for normal retails, we can't know if there's actually buy stops there. Most likely they will, but even if they are, they can't be seen. And since we have to rationally understand this, and until proven guilty, no one else can see these buy stops except for brokers.
So since buy stops and sell stops are not in the upper part of the order book, they are not limit orders, they are stop orders, and they are buy orders above the current price. They are actually market orders. So you place a buy stop order in your brokerage account, and the broker will execute that buy stop market. Okay, this is really important. He will execute it market at the best ask if it's a buy stop, or at the best bid if it's a sell stop. So buy stops are market orders, and they will be executed at the best possible price where there is at least one contract as a counterparty. So say that we have 20 contracts as stop contracts above here, and 100 contracts stop contracts above this level. Let's say it's a total of 100, 12 contracts that are going to be executed in the next candle. These contracts will be executed market at the best price. So five will be executed here, maybe seven will be executed here, another 10 will be executed here, another, I don't know, five will be executed here, 20 more will be executed here, and so on and so forth. So the candle, in a matter of milliseconds, is going to sweep the book. That's why this dynamic is also called book sweeping.
So actually, the liquidity sweep, it's not a sweep of stop loss because stop loss are the ones which are sweeping the book. So in a stop run, the liquidity which is being swept or sweeped is sell limits. All right, I'm sure 90% of you thought that liquidity sweep was stops being swept, but for market mechanics, stops are the ones sweeping, not the ones being swept by definition. So in our footprint candle, there's probably going to be five of these orders here. Those seven orders that were here are going to disappear and placed over here. Those 10 orders here are going to disappear and get here. Five more orders that were here are going to disappear and get here, and 20 orders that were here will disappear and get here. And all the rest of the contracts, 25, 30, 47, and so on and so forth, they will be gradually executed at higher and higher prices because that's where the best level of the order book ask level will be. And usually, in a low liquidity environment, you will see 0, 0, 0, 0, 0, 0, 0. So all this part will be colored green in your footprint chart. Most of the times, there is still going to be some level of activity above here, but a smaller percentage of contracts. Anyways, because HFTs are really fast, because there's a high percentage of HFT activity in the market, so there's still going to be some level of orders executed here, but the ask side of the footprint is going to be way more voluptuous than the bid part of the footprint. And since ask lifted minus bid hit is our delta, the delta of this candle is going to be really high, at least above 25%. So most of the contracts is going to be aggressive orders because this is a spread, this is the best bid, this is the best ask. So since most markets are very liquid, especially the S&P 500, very quickly these levels will be repopulated by market makers. But it's highly probable that there's not going to be a lot of them because it takes some time.
So the first thing that will happen is that price is going to go through the path of least resistance and get back, filling this level. And at this point is where things start to get a little bit messy because while there is a 60 to 70% chance that this will happen, the chance of this happening are actually not that high. And trust me, I've been studying this pattern for the last two years. But one thing that will probably happen is that we reabsorb the candle, and then maybe we can invert. But sometimes these aggressions will win, let's say, and the market will keep buying. Let's see some real examples.
Now, this is a stop run that you can go and verify yourself if it happened. The 29th of April, around 4:00 AM on the ES contract. Let's make the numbers a little bit bigger. So as you can see, all this part of the candle is completely green with delta, which means aggression and also absorption. The delta of the candle is really high, almost above 40%. And as you can see, there were a bunch of highs above here, and most of all, there was a previous day high above here. But as you can see, there is not as many buy stops as you would expect. Probably there's going to be 200 contracts which are sitting right above this high, which is the high of a whole session. So there should be a bunch of them up there, but instead, there is very few of them. 900 contracts, that is not a lot, my friends. So the first question we're starting to ask is, is it worth it to move all the contracts that has been moved in the long part in this move up just to take this miserable amount of contracts? I highly doubt so.
So let's take the heat map and take that 46.5 level, which is this one. So right above this high, we would expect stops to be triggered, and also above these highs over here. There you go. So if we zoom in, this is what actually happened during the stop run. Stops were triggered above all these highs, and they completely deleted all of this liquidity. And now all this part is black except for these two levels. But if the market was to, you know, go and hunt for liquidity, there's a much higher liquidity above here that wasn't even get close to. And these, as we discussed, are sell limits.
Then if we open this indicator, which is basically a stop run indicator, it's going to tell us with even more accuracy and confirmation by using tape speed and MBO data if those were actually stop orders. Now, let's take this other session as an example. After a bullish day, we've consolidated here for the whole session. New York open, there was a news release, and right at the opening of the cash session, we are going right below every single low of the session to fuel the next move up. And if we look down here, yes, there has been a very strong aggressive sell selling move, a fairly high amount of orders being exchanged down here. But always remember, if you think that smart money or institutions are buying here and retails are selling, let's sum up all the volumes here. So below here, 50,000 contracts were executed, which means 50,000 sell contracts, but also 50,000 buy contracts because every single one of the contracts that you see here are contracts being exchanged. So for every single contract, there's both buyers and sellers. So there is no way to accurately assess if these were retails. But let me tell you, 50,000 ES contracts is not retails. What's happening below this low is a war between much bigger fishes, and eventually someone will win that war. So saying that they went above here to induce and went below here to induce is a little bit presumptuous. This was not a stop hunt or a stop run. This was something completely different because, as we said, a stop run is purely stops being triggered and hitting the bid or hitting the ask. But this candle over here has a 177% delta. Yes, there is more aggression, but there's a huge level of buy activity also on this side of the candle. This other move down, which was allegedly taking stops below here, which were very few, has a 2% and 5% delta, which means that they are really balanced candles also on the aggression side of things.
Now, this is another similar situation where we're in an uptrend. This is our demand zone. This is technically liquid, as we've seen. Liquidity is a much broader concept than sell stops. So let's see below here what actually happened. Price broke below these lows, and below here, something extremely interesting started happening. Can you notice something weird? Let me show it to you. This level is not normal. This level is also not normal. There is 26,000 contracts plus 699 plus 1.2,000 contracts all executed at one level. This is what we call an iceberg order. We've explained it in the previous videos, and this iceberg order specifically is a sell iceberg order. There is no [ __ ] way in this [ __ ] world that 5,000 retails decide altogether to sell limit at the same exact [ __ ] tick. This is institutional activity. This was one of the big players in this market that was trying to block all the buyers and sell the [ __ ] out of them, hoping to go low or taking profit from a long position. And at the same time, this is also be other huge market participants buying into that level. This is not stop orders of retail traders being triggered. This is numbers. This is undeniable. Whoever thinks that this activity is retail traders is completely fooling himself. Complete and utter [ __ ]. The real war is happening between big market participants.
Then, as I said, so yes, this is an absorption. There's actually a lot of volume going on down here also because of the sell pressure. So yes, some retail might be also here, but only 5% of the activity are retail traders. If we take the Commitment of Traders report and look for the E-mini S&P 500 contracts, which is the one we're talking about here, we will see that in the last period, which is mainly bearish in the S&P 500, more than 40% of the shorts are held by eight or less participants. So I would say that the 20 or 30 biggest participants are moving 90% of the volume. Retail traders are just a very small fraction. And if you consider in the COT data, non-reportables to be retails, remember that in the ES, non-reportables are positioned below 1,000 contracts. So calling a retail someone that moves 999 contracts of the S&P 500 takes balls. So actual retails maybe move 5, 10 contracts on the S&P 500, which means that all of the 50,000 contracts that were executed here, maybe 2.5 were actual retails. So there is no way they moved throughout all of these prices not knowing that there's going to be an iceberg order here blocking them on the way up.
So my question to you is, do you really think that, and by "they," I mean eight or less traders, were sitting at a table together deciding every single day, while being competitors, that they were going to go down here to catch some retail trader stop losses? I mean, do you really believe that? Are you that stupid? Because if you believe that, numbers are saying something else. Market mechanics are much more complex than that.
Now, since this misconception is mostly around the ICT space, or they say that markets are rigged and that banks hunt for your stop losses, even though I highly appreciate the whole ICT method because it can be, even though I mostly disagree with some of the things he says, some things instead are fairly accurate. Some other things, though, like banks are hunting for retails, are completely out of this world. And no, there's no algorithm ruling in the markets, which is actually this video. Let's actually hear it from his words.
"Look at that, his stops is above here. You guys are following my stops. You guys are following my stops. Remember I was saying in the first few minutes of the stream, if everybody goes to the same place, at the same corner, that's where the drive-by is going to happen. I was telling my private students that this is an interesting observation because if I place my stop publicly and people are going to be following me in a large degree, that's creating an engineered liquidity."
He's saying that the 15,000 people that were watching this live stream placed their stop loss around the same place, 1766550. NASDAQ won't drop, S&P dropped, Dow dropped. There should be stops. Don't you think these markets are rigged? Yeah. And he says, "Don't you think these markets are rigged?" I'm sorry, guys, but I strongly disagree. Let's actually take the Mini NASDAQ and go back to January 24th at New York open. So let's put ourselves in 30 seconds. So there was supposed to be buy-side liquidity here, sell-side liquidity below here, and his stop loss was right above this candle over here, exactly at 1766550. Now we rolled over that contract, so we don't have the exact prices, but it would probably be somewhere around here. And apparently, even in a higher timeframe, there's no sign of those 15,000 stop losses. Only 2.4k contracts were executed here. But one other thing that we're not considering here is that most of the ICT followers are trading CFDs. So when they take their stop loss, most likely the counterparty to that stop loss is their broker or their prop firms. So there is no way in this world they moved all of these billions of dollars to catch some stop losses that apparently weren't even there. And shouldn't they take them to fuel a move down? Then why the move went up? I ask. And why didn't they catch all the stop losses below these equal lows? See, market mechanics are way more complicated than that.
If believing otherwise makes you more confident in your edge, throw this video to the bin because if a particular strategy works for you, you should keep going for it, bro. But if you're actually looking to truly understand the market, I will never get tired to say that markets are much more beautifully complex than banks hunting for retails. Now, this video has been long already, so I will make a second video around different kinds of fake-outs, how they work with order flow, and how to use my Stoer indicator. So if you want to follow up on that, subscribe to the channel.