Stop Hunting In Trading Exists, But It’s Not What You Expect It To Be

Stop Hunting In Trading Exists, But It’s Not What You Expect It To Be

Stop hunting exists!

Yes, it truly does but it is NOT your broker that is hunting your stop. The brokers don’t care, in fact.

But there are market players that do care. A LOT! They need your stop badly to make money.

Stop loss orders represent liquidity in the markets. And the big players such as banks, big institutions, hedge funds, etc. need liquidity.

Those big players cannot just enter a trade at once, but they slowly have to build a position by “hunting for liquidity”. And stop lossorders in the markets are the best way to get liquidity.

But what do you do now? There are two things you must do:

1. You must learn how to avoid becoming the victim of stop hunting. Therefore, you need to know how the big players think and trade.

2. You must learn how to profit from stop hunting. Instead of just trying not to get in the way of the big players, you can align yourself with the big traders and join them. Once you know how stop hunting happens, you can join them and trade like a big player!

 

Common Trading Knowledge About Stop Hunting Is Wrong – Again!

  • The more obvious a support or a resistance level is, the stronger and more reliable the signals around it are.
  •  A support and resistance level is confirmed after the third time price comes back to the same price level.
  • Put your buy order right at the support level and your stop right below it.

Those are just a few examples of things that you read in trading books or hear from trading “experts”. However, think about this for a moment…If everyone wants to buy at a certain price, who are they going to buy it from? Exactly, you need a seller for every buyer. If the smart and profitable traders want to buy a certain support level but expect the mass of other traders wanting to do the same, they’ll have to find ways to get traders on the other sides of their trades.

 

Your Broker Doesn’t Hunt Your Stops

If you are using an unregulated broker from a dubious country and experience abnormal price movements or strange spread developments, then it’s your own fault.

There is a great variety of well-regulated brokers who are (relatively) safe to use.

The average retail trader will blow their account anyway, so there’s no need for the brokers to engage in illegal activity (usually). If you are still skeptical, use a regulated ECN broker with a fixed spread. If you hear other traders complain about stop hunting, they are either bloody beginners or don’t understand how the markets work.

 

Mental Stops Are Not The Solution To Avoid Stop Hunting

If you start searching on how to avoid getting stopped out easily, the advice to use mental stops is among the top 5. But please, don’t start using mental stops just because you think that it will make you immune to getting stopped out. Using mental stop-loss orders has no advantages over using a regular fixed stop.

 

How Smart Traders Mess Around With You

#1 The Bull and Bear Trap

Making traders take trades in the wrong direction is a very simple thing to do and you have noticed it before as well, without being aware of it. Let’s say you want to buy a support level after price drops back into it. Often you’ll see the price going through the level and it looks like the level isn’t holding and the price is breaking out.

This scenario is ideal for smart traders. First, those traders who have prematurely bought a potential bounce off support see price heading for their stops (which are essentially sell orders). And second, the other traders who have waited patiently are now looking to sell the (fake) breakout. The average, retail traders are now all happily selling to the profitable traders who are even more happily buying from them for a very good price.

Because of the high demand from the profitable traders, prices will rise and now take out the stops from the traders who sold the fake breakout – which is accelerating the bullish move even more. The traders who are now left with profits are, as usual, the smart traders. The frustrated losing traders will see that their initial idea of buying support was correct and they are left thinking that it wasn’t such a bad trade after all – probably just some “weird” and “messy” price move. “Next time it should work again”, they think… It will, but not for them!

 

#2 Triggering Your Greed and Fear Responses

This price behavior is another amateur-trap and it works similarly to the Bear and Bull Trap. But the way it plays out on your charts is slightly different and therefore, worth pointing out.

Let’s say the price is currently at 110 and keeps falling towards the very big support level at 100 where you, and probably 90% of all other traders, want to buy. Very often you’ll then see a reaction ahead of the level. When price starts twitching at 102 and starts moving up a few pips, the impatient amateur traders will get very nervous and fear that price has already found support and will take off without them. We traders are a very greedy bunch of individuals and we hate it when price misses our orders by just a few pips. The profitable trader knows this and will use it to their advantage. Therefore, the amateur traders will prematurely pull the trigger and take a long trade even if the price hasn’t come to the actual support level yet.

The smart and profitable traders can now drive price further down, generating panic among the long positioned traders and then buy back from them when they exit their trades because they think the price is breaking down. The result is similar to the one of a Bear Trap, with the difference that the way of tricking amateur traders into losing trades is slightly different.

 

How To Avoid Getting Tricked Into Taking Losing Trades

Those are just 2 examples of how losing traders get tricked into making wrong assumptions about price movements, but if you can understand the psychology and thinking behind them, you’ll be able to understand the drivers of price action and the herding behavior, in general, a lot better.

 

Tips On How To Avoid Stop Hunting:

  • Don’t use the obvious levels for your stops. Big round numbers are a very bad choice for picking your support and resistance levels.
  • Research shows that exchange rates trend faster after crossing round numbers suggesting that stop-loss orders propagate trends.
  • Stop-loss orders are tightly clustered near rates ending in 00.
  • Add your spread + a few pips of extra padding to your stop. The padding is key!
  • The more people talk about a certain level, the harder it is to profit from it.
  • Add a column in your trading journal and keep track of how far price moves against you. This is an excellent way to see if you enter too early or place your stops too conservatively.
  • Get in the heads of the average retail trader. It’s usually very easy to figure out what they see on their charts and want to do. Then do the opposite.
  • Use confirmation criteria in your trading as an extra filter
  • If a trade is too good to be true, it’s too good to be true

 

Comments ( 4 )

  • Robert

    yes, is true, brokers couldn’t care less.
    Brokers make money whether we win or lose.
    Better for them to behave themselves and keep taking our spread anyway, is their bread and butter.
    But there is normal daily fx transactions all the time happening, globally, plus it is the games the banksters play with us all the time, that qualifies as stop hunts, just because they can, right?
    If I could do that as well I would, nice job if you can get it.
    Thanks for the article Rolf.

  • Robert

    oops meant to say as well that it helps for traders like us to realize that it is the banksters that control 70 to 80 percent of all the market volume, depending on who does the counting,, so we are small fry aren’t we, so best we go with the ebb and flow.
    later
    Robert

  • ChasS

    Real-world trading ! Excellent.

  • Jeff

    Probabilities are what is important and using risk reard to put them in your favour as there are no rules that work all the time,sometimes a bif figure will lead to a great trade and some major market turns are within a couple of pips of a big figure,other times price just goes right through these numbers.
    Sometimes fibs work sometimes they don’t.sometimes supply and resistance work sometimes they don’t etc.I’ve noticed a huge improvement in profitability since only going for 3/1 or better risk reward after reading an article on it by Rolf and really understanding it wel!Paul Tudor Jones said he only took trades with a 5/1 risk reward and his record speaks for itself.

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