Running the Stops

This mostly happens in the futures market (although it can happen in any market) when liquidity is low and the market breaches an important resistance or support level. Stops that are waiting just beyond the support/resistance level are triggered which cause the market to move quickly in the prevailing direction triggering more stops that are beyond the level and creating a snowball effect.

This can only happen if the number of contracts at the stop levels exceed the number of contracts being bid or offered at those same levels.

Say the market is moving down we have a DOME that looks something like this:

#Bid     Price

20       980

40       979

35       978

We can see how many contracts are bid at each level but for obvious reasons we cannot see how many stops are at each level. This is because stops are usually held on the broker's servers or in the minds of traders watching the market.

If there are 30 stop contracts that will be triggered when 980 gets touched then 20 of these stop contracts will immediately absorb the 20 contracts bid at this level and also clear out 10 of the 40 contracts bid at 979.

Now say that there are 80 stop contract at the 979 level. There are only 30 contracts still bid at this level because the previous stop action cleared out 10 of them. These 80 contracts will clear out the next 30 and the remaining 50 contracts will clear out the 35 contract bid at 978.

If these stop orders are being held electronically at trader's brokers' servers then these stop orders will be triggered instantaneously and will cause a ripple or cascading effect until all the stop orders have been filled forcing the market to move quickly in one direction.

Running the stops is when a trader (or group of traders) anticipate that this scenario will unfold at a price level and they push trading to that level to trigger these stops. Their strategy is to hold a position in the prevailing direction and when the market spikes in that direction to let the stops run their course and then close out their positions when the speed of the movement slows down or stops thereby maximizing their profits.