Probably if you are frequently trading any financial market, there are times you would have experienced fierce move against your trading positions and your stops would have taken out all in a sudden. Have you ever wondered why this happening again and again and again?
Stop Hunting is generally adopted by stronger players ( in matured stock/commodity markets it could be even driven by algorithms ) either to remove the weaker players from the market, to generate momentum, to seek liquidity or to generate volatility to benefit from it. Generally stop hunting happens during mid-day where the liquidity is dried up.
Here is what investopedia says,
So how do they know your stops?
Actually it is pretty simple. Here are some of the possible reasons
1)Most of the retail traders are bound to place their stoploss at round figures like 7800, 7900, 7950, 8000,9000 levels. Order Clustering effect around round numbers is well explained here
2)Most of the retail traders thinks like the majority of the crowd think especially during events, gap up or gap down situations, global markets reactions, political or economic events, earning results.
3)Most of the retail traders are highly leveraged. Eg trading two or even more lots of Nifty Futures with 1 lakh rupees to generate higher returns. Traders who are falling under this category are poised to trade with tight stoploss and so their trading behavior is predictable.
4)Most of the traders have a belief on their support and resistance system and that make them to place stoploss near to their belief zone. However in reality supports/resistance are meant to be tested and there are times you could even seen too many whipsaws around where the major crowd thinks the zone to be supports/resistance.
@Trader_Dante broker definitely knows. lol.
— laissez (@laissez_aller) September 1, 2015
5)If you are emotionally driven with your trading decisions then possibly you end up catching wrong prices and thereby again poised for stop hunting. Especially when you are trading the following methodologies:
i) Previous day high low breakouts, Trading around Open Price
ii)Popular Moving Averages like 20,50,100,200
iii)Fibonacci Support/Resistance levels
vi)any other strategies widely adapted by most of the traders.
If you are system trader then you dont need to bother about stop hunting. However if you are discrete player you should care about stop hunting and more possibly try to have a better understanding about markets , market players and try to adopt efficient trading process. Else you will be no different from weak players in the markets.