Probably if you are frequently trading any financial market, there are times you would have experienced fierce moves 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 a trading strategy that involves manipulating the price of an asset in order to trigger stop-loss orders placed by other traders. Stop-loss orders are orders that are placed to sell an asset if it falls to a certain price, in order to limit potential losses.
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 when the liquidity is dried up.
Traders who engage in stop-hunting try to push the price of an asset down (or up) by aggressively buying (or selling) it, in order to trigger the stop-loss orders of other traders. This can create a cascade of selling (or buying) as the triggered stop-loss orders are executed, leading to a sharp move in the asset’s price.
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 stop loss 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 think like the majority of the crowd think especially during events, gap-up or gap-down situations, global markets reactions, and political or economic events, earning results.
3)Most retail traders are highly leveraged. Example: 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 stop loss and so their trading behavior is predictable.
4)Most of the traders have a belief in their support and resistance system and that makes them place stoploss near to their belief zone. However, in reality, supports/resistance are meant to be tested and there are times you could even see too many whipsaws around where the major crowd thinks the zone to support/resistance.
The market doesn't know where your stop is. It knows where everyones stop is. You just put it in the same place.
— Tom Dante (@Trader_Dante) 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 to 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
iv)Pivot points
v)Trend lines
vi)any other strategies widely adapted by most of the traders.
There are a few different strategies that traders may use when engaging in stop-hunting:
- Fake-out moves: This involves creating a false sense of market direction by intentionally making a large move in one direction, only to reverse the move shortly afterwards. This can cause traders who have placed stop-loss orders in the opposite direction to have their orders triggered, leading to a sharp move in the asset’s price.
- Position accumulation: This involves gradually building up a large position in an asset over time, in order to have enough buying (or selling) power to move the price and trigger stop-loss orders. This can be done through legitimate trading activity or through market manipulation.
- News manipulation: This involves using the release of market-moving news or events to create a sudden price move that triggers stop-loss orders. For example, a trader may spread false or misleading information about a company in order to create a sudden drop in its stock price and trigger stop-loss orders.
If you are a system trader then you don’t need to bother about stop-hunting. However, if you are a discrete player you should care about stop-hunting and possibly try to have a better understanding of markets, and market players and try to adopt an efficient trading process. Else you will be no different from weak players in the markets.
Some traders try to protect themselves from stop hunting by using mental stops (which are not actual orders placed on the market) or by placing their stop-loss orders at a larger distance from the current price to make them less likely to be triggered by normal price fluctuations. However, it is important to keep in mind that stop-loss orders are not foolproof and can be triggered by market moves that are beyond the trader’s control.
Stop-hunting is considered a controversial and unethical trading practice because it can cause losses for traders who have placed stop-loss orders. It is also difficult to identify and prove, as it can be disguised as normal trading activity.
