Wiping out stop losses to create liquidity?

External question — Personal Finance Stack Exchange Author: noplace Original post: https://money.stackexchange.com/questions/163267 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. It is the second or third time that I read something about this theory (is it only a theory or has it been proved?) on how institutions or professional traders are often pushing prices somewhat beyond a resistance or support level where they know retail traders are placing stop losses to wipe them away, creating liquidity, and then resume a trend in whatever direction this was moving. I still do not fully grasp this concept. A couple of points I don't get are the following: How are bigger fishes able to move prices beyond resistance or support levels? I suppose they cannot be as agile as retail traders (they cannot throw in large sell or purchase orders as fast as smaller traders) and I suppose they also leave marks behind them (block orders?). Why does wiping away stop losses create liquidity? What does liquidity mean? And why is liquidity needed for normal price movement/dynamics/action?

External answer — Personal Finance Stack Exchange Author: MD-Tech Original post: https://money.stackexchange.com/a/163268 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Institutional and professional traders have pretty much no interest in wiping out any other participants and it would be against the law in at least the UK and EU to be trading to do so. This is because the trading is not for genuine reasons and as such falls under the market manipulation banner. To your specific questions: Bigger traders are much more agile than retail traders as many of them have an outpost at the exchange within meters of the exchange's servers where their high frequency algos can enter multiple thousands of orders a second across all instruments. The decisions are taken in nanoseconds by code rather than by a human trader, although the algos could easily be written to manipulate the market, perhaps even by trading to these significant price points as you indicate. They do this in order to trade out arbitrage opportunities as quickly as possible, and to provide liquidity. More on liquidity later. Wiping out stop losses takes liquidity rather than making it as liquidity is really the ability for a participant to trade the instrument without having a large effect on the price. Unfortunately it is generally measured in the popular literature by number of trades or amount of volume traded which means that some can interpret participants taking resting orders (limit orders sat on the book) as being "providing" liquidity. Exchanges tend to use the width of the spread or the depth of the order book to measure liquidity and using number of trades alone is a highly misleading measure. Normal price movements are aided by higher liquidity since there are more participants in the market where liquidity is higher and this increases the amount of information as to the economic price level of the instrument which is the whole idea of a market. There is a theory I've vaguely heard that some participants would want to make money by lifting retail traders' resting orders at significant price levels where it could have a large effect on the price. One issue with that is if you are, as in your example, going against the trend to push the price to a support level they are likely to need to take on a lot of instruments at a worse price and thereby wipe out their potential profit. Remember that the stop losses are limit orders placed to protect a position and if the market price is trending away from them it will take a lot of volume to hit the resistance levels. Another issue with this is that generally resistance levels are taken by technical traders to show a reversal of the trend so if this larger entity took all of the available orders at the resistance level so that there were no remaining orders the institutional and retail technical analysts could well take that as a reversal of the trend and push the price even lower. If that occurred it could cause even bigger issues with this "big fish's" risk team as they would be over-concentrated in a losing position.