How to Make Money Day Trading “Stop Runs” with the Pros
By: Dr. Barry Burns
Top Dog Trading
Stop running is a professional approach to making money in the markets (stocks, futures and Forex). The pros love to do it because it provides them a relatively easy way to put money in their pockets. Amateurs traditionally have hated the concept, feeling that the professional day traders are taking advantage of them.
But retail traders needn’t feel that way. There is a way that you can use the Stop Running Technique to help build your trading account too!
Before we get to that, let’s describe what stop running is (there is also a video at the bottom of this page that will give you a clear visual picture of what is described in this article).
What is a Stop Run?
Daytrading professionals, most notably floor traders, watch for major, very visible, highs and lows in the market. They are watching for those levels because that is where many people place their stops.
For example if the market is in an uptrend, the pros will look for significant swing lows. By “significant,” I means lows that clearly and visibly stand out to anyone looking at a chart. It is under these lows that many traders will place the stop orders for their long positions.
In certain situations (as described below) the pros will intentionally drive the market down to take out the stops of the amateurs, and then immediately buy the market, causing it to go back up in the direction the amateurs originally had their long trade positions.
How the Pros are Able to Do a Stop Run
As mentioned above, not every swing low is a candidate for a stop run. The swings that are good candidates are those where the bullish activity is supplied mostly by amateur traders that trade small size relative to the
pros.
This is a clear battle between the pro and the amateur. Professional traders have much bigger trading accounts than the amateurs so they are able to
overpower their positions by trading more volume.
In addition, the best candidates for stop runs are those where the market hasn’t move far from it’s swing low. The pros are willing to sacrifice a little money, but not a lot for this technique, so they will wait for a natural retrace in the trend to occur, and then as it approaches the low, they will simply “help it out a little” buy adding some volume to it – just enough to
barely take out the stops.
Why the Pros Do this to the Amateurs
Amateur traders are usually very offended to learn that the pros intentionally hurt them with this technique. They also wonder why they would do it.
Trading is not a team sport. It is a survival business and very cut throat. When you take a trade, there is someone who took the other side of that trade. It’s very competitive and is often compared to war. Don’t expect other traders to care about your success. I’ve been to the Chicago Mercantile Exchange, been trained by floor traders there, and been on the floor itself. I can assure you that everyone is there to “get theirs” – it’s a “dog eat dog”
world.
But why would the pros take a position to go short, even if only for a few brief moments, when what they really want to do is be long the market?
It’s a short-term sacrifice for a long-term gain to provide a great risk/reward ratio.
The fundamental rule of successful trading is to buy low and sell high. And that’s what stop running is all about.
But “buy low, sell high” is an over-simplification and is relative. What you really want to do is get in before everyone else because buyers make the market go up. So if other people bought before you, then you are already late to the party. There aren’t as many buyers to come in AFTER you to continue driving the market farther and farther to the upside.
The reason pros take out stops, is to remove the positions of the buyers who got in before them so the pros can be first to the party. Then all the people who buy after them will move the price of the stock, future, currency, higher in their direction.
The earlier they get in, the more buyers there are to come in after them and therefore the further the market is likely to move up.
How You Can Profit From Stop Runs
Amateur traders cannot create stop runs because they simply don’t have the buying power to do so.
However they can participate when the pros run stops if they know how to identify them. The stop running pattern is extremely low risk with a potentially very high reward.
It is also quite easy to see when you know what to look for.
Stop Running creates a chart pattern with the following 4 characteristics
- Identify a major swing high/low
- Look for a retrace to that swing high/low
- The market will slightly pierce that swing high/low
- A reversal candlestick pattern is created at that swing high/low
Entry would be above/below the reversal candlestick pattern in the direction of the original trend.
For a visual presentation of this article, showing chart examples, please enjoy the brief 3-minute video below:
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