Stop Hunting – Definition & How to Protect Your Trades from it?

Trading concepts

Stop Hunting

Stop hunting is a trading technique that most traders employ to force other traders to abandon their positions. The goal of those market influencers is to increase volatility and also lay the foundations for highly lucrative trades. This, stop hunting turns out to be very dangerous for small retail traders as they incur huge losses. Therefore, it is important to know what this technique is and how to protect your trades from it.

So, if you want to know all about stop hunting and how to protect your trades from it, then there is no need to look further. Because we are going to define stop hunting in the easiest words. We are also going to explain how to avoid it to protect your trades.

Stop hunting definition

Stop hunting refers to a technique employed by traders and investors with huge trading accounts. It involves trapping retail retailers in their trades by breaking on either side to take stop-losses of either bulls or bears.

In simple terms, stop hunting is a deceiving trading technique those big players of the market employ. It involves hunting stop-losses of other market participants by pushing prices to a point where stop-losses get triggered. 

Stop hunting explained

To understand stop hunting, it is imperative to know about stop-losses. Stop-losses are orders that enable traders to hold positions without risking too much capital. In other words, they help traders in risk management. Traders specify that when the price of a financial instrument goes above or below a certain point, their assets should be sold to prevent losses. Thus, stop-losses empower traders to exit losing positions before incurring too many losses. 

Moreover, traders tend to put stop-losses around whole numbers just above or below support or resistance levels. For example, a trader going long on the stock of a company ABC. Now suppose that $55 per share is the current price of ABC’s stock. So, where will the investors put their stop-losses to prevent risking too much? Most of them will put stop-losses just below the resistance level and around a whole number i.e. $50. 

Now, what do big market players do to stop hunting? They actually use their big accounts to push prices to a point where stop-losses of retail traders get hit. As a result of it, stop-loss orders become active and a huge amount of that particular instrument gets released onto the market. That said, volume increases significantly and so does the volatility. Eventually, prices get to the point that offers lucrative trading opportunities for big players. 

How does stop hunting work?

It is a very simple phenomenon. As experienced traders can easily determine where most retailers put their stop-losses, they can easily hunt them. For example, the majority of traders tend to put stop-losses just above or below support or resistance levels. Market influencers can easily determine that level and try to hit that level. They overwhelm that level by using forces of supply and demand to force bulls or bears respectively to get out of their positions. 

Moreover, human emotions also play a key role in both, making a profit and incurring losses. No one can deny the fact that emotions are very crucial in the lives of humans. In other words, humans aren’t machines and they get influenced by their own emotions. For example, an emotional domain consisting of fear and greed is common among humans all across the globe. The involvement of these emotions in trading proves detrimental to trading. How so? Because fear and greed make us buy and sell. AND that is what shrewd traders use to their advantage. It also plays a vital role in stop hunting. 

Now, let’s try to understand how bears and bulls are trapped. In a bear trap, market influencers make prices break below an obvious support level. Retailers’ stop-losses get hit as soon as prices breach that support level. And this isn’t the whole story. The real story is retailers sell while big players begin to buy that asset.

Conversely, in a bull trap, market influencers make prices break above an obvious resistance level. Retailers’ stop-losses get hit as soon as prices breach that resistance level. Additionally, breakout traders also begin to buy when an instrument breaches a resistance level. However, big market players sell their assets and thus prices fall dramatically. So, this is how bulls are trapped. 

Why do big players hunt stop-losses? 

The answer to this question is pretty simple and straightforward. They do stop-loss hunting to make more money. This technique empowers them to avail the best price for their large orders. As you know, such players have significantly huge order sizes and seek better filling prices. Therefore, they try to push prices in a favorable direction.

How to protect your trades from it?

Here are a few useful tips to protect your trades from stop hunting. 

  • The most effective strategy to avoid stop hunting is to avoid it completely. As you know, stop hunters often target obvious support or resistance levels. Therefore, you should never enter or exit a position at those levels. Waiting for confirmation is the best strategy to avoid stop hunting completely. 
  • Another good technique to avoid stop hunting is to employ a proven stop-loss technique. It should be compatible with the financial instrument in consideration. Therefore, always do the research and employ a good risk management strategy. 
  • You should also take volatility into account when setting stop losses. Big players always try to use volatility to their advantage. Therefore, they employ stop hunting to create favorable positions for entering or exiting trades. The best way to do it is to stop placing stop-losses around a round number or key support or resistance levels. 

Do brokers also hunt your stop-losses? 

The answer is no. Brokers don’t hunt your stop-losses. There is a huge variety of brokers that offer highly regulated and safe trading platforms. Most brokers have become big institutions and they never get involved in any fraudulent activities. However, if you choose to use an unregulated broker, then this is your own fault. 

Always remember that brokers don’t do stop hunting. It is only possible because all traders have access to the order book. So, big market players consult order books to know about buy, sell, and stop orders. They use it to their advantage whereas others become their victims who don’t understand how the market works. Therefore, it is imperative to learn about different market aspects, and stop hunting is a very important aspect of the market. 

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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