Between 65-90% of retail Forex traders will lose their entire trading account, in large part because they don’t know where to place their protective stop losses. Institutional traders are the ones who profit from individual trader losses as there is a predictability in the behavior of retail traders, and how they trade the Forex market.
What is stop hunting?
Stop hunting forex is obviously the most dreadful and the least understood event that beginner retail traders fall victim to. There are also numerous conspiracy theories surrounding this market occurrence. That is why I felt obligated to write about the subject and explain a few nuances of this regular market phenomenon. You’ll see this topic being discussed in Fx communities by novice traders a lot. However, not many of them understand what’s really going on when this type of price action occurs on a daily basis.
First of all, we need to find out who is hunting our stop-loss orders…is it a broker? …is it a market-maker? …or, maybe, some other mysterious force?
Who is gunning for your orders and most importantly – why?!
Now, before we go explaining this most intriguing topic lets answer these questions: What Is It? Stop hunting refers to an event, in time when a lot of traders’ limit orders are triggered. In most cases, these are the stop-loss orders. When a speculator is holding a position long, or short, doesn’t really matter, stop hunting happens when the majority of these stop-loss orders are executed.
Soon after this, the trade direction changes and price action moves in the opposite way. The triggering of the stop-loss order, on already opened positions, before moving in the original direction is what’s known as “stop-loss-hunting.”
Stop hunting is a trading strategy that involves triggering the stop loss orders of other traders in the market to trigger a temporary high-volatility trading environment.
The forex market is the most highly leveraged financial market in the world – meaning that traders take on debt to acquire larger positions than they could with only their cash on hand.
Stop hunting works on the basis that many traders tend to gravitate towards certain price levels to set stop losses.
Because forex trading involves a great deal of leverage, traders large and small often employ stop and stop-limit orders to stave off margin calls or lock in profits automatically.
Stop hunting is a strategy that attempts to force some market participants out of their positions by driving the price of an asset to a level where many have chosen to set their stop-loss orders.
Precisely because the forex market is so leveraged, most market players understand that stops are critical to long-term survival. The notion of “waiting it out,” as some equity investors might do, simply does not exist for most forex traders. Trading without stops in the currency market means that the trader will inevitably face forced liquidation in the form of a margin call.
The triggering of several stop losses at once can lead to high volatility and present a unique opportunity for investors who seek to trade in this environment.
One of the primary goals of an Institutional trader is to place a trade in the market with as little impact on the price as possible. Which, essentially means finding places (liquid-zones) in the marketplace where a lot of liquidity exists.
The majority of the time, pockets of liquidity likely to be found at places where speculators put their stop losses on existing positions, or their new pending buy/sell limit and buy/sell stop orders.
Stop losses, being what they are – pending orders on the existing positions, and fresh buy/sell pending orders, are the key in understanding why Institutional traders enter or exit the market at specific areas.
Stop hunting forex also, and most certainly, happens during the market accumulation phases. During this period market just chops around in a sideways motion. Basically, the market locks everybody in a range-bound channel and trades from the top side of the channel back to the low side.
Many traders usually put their stops above, or below the channel (range) not giving enough room for the trade to breathe, so to speak. In the end, their stops are taken out and the market goes its way without their participation.
What this all means, for the most part, the stop hunting forex occurs, because of Liquidity, or should I say, the hunt for the liquidity.
You see, we as retail traders do not trade at a size big enough to affect the price.
When placing or exiting a trade we never have to think about the liquidity, or fills, or slippage. For the large Institutions though, getting in and out of their positions can be a big problem, because the trades that they place are so large.
Stop hunting has a negative connotation among retail traders because they think their individual stop losses are targeted deliberately. In actuality, Institutional traders are only looking for significant clusters of stop-loss orders that are gathered at visible technical levels.
Institutional traders will buy at the levels most retail traders place their stop losses at. As an institutional investor trading larger volumes in a single trade, it’s harder to get an order filled. Occasionally, in order for a large order to get filled, the institutional trader will need to generate the liquidity themselves. And, as retail traders hide their stops at obvious technical levels, this becomes an excellent source of liquidity for the big players to target.
You may hate it, you may not pay attention to it, you may even not bother understanding it, however, the fact remains that given the way the markets operate, stop hunting forex is often a common behavior.
Markets seek orders, they seek liquidity. Without new orders, prices will be at a standstill.
For retail traders these are protective orders. However, for the Institutional speculators, these are the sources of liquidity. When the Big-Boys initiate their positions, substantial orders need to be filled.
So, to fill their orders market-makers need to find liquid areas.
In other words, market-makers need to find clusters of stop-orders (liquidity), trigger them and at the same time fill them up with Institutional orders. This is where market-makers fill Institutional positions without giving up their intentions, their directional commitment. This is where and why the majority of retail traders getting stopped out of their positions.
Learn To Trade Our Strategy
Our Strategy focuses on supply and demand, market sentiment, momentum and Stop Hunting ( Order Traps and Fakeouts)
Supply And Demand Trading
As supply and demand traders, we do not need to pay attention to the news, fundamentals, or any earnings reports. Why is it that you see positive News and then the underlying market drops like a rock, or a negative news announcement and the market rallies? You are probably missing the fact that big institutions are trying to make money!
Unless you are doing very short term trading and scalping, you should not worry about fundamentals or earnings announcements.
You can use these imbalances to plan your trades in lower timeframes. Trading is just waiting for the right trigger points and scenarios to present themselves. We need to patiently wait for the correct scenarios and setups to happen and wait for the price to react from our levels and we can take advantage of these moves!
If you want to learn how to trade using our trading strategy, join our Price Action Trading Course.
What are Fakeouts (Order Traps, Stop Hunting)?
First things first, before you can learn our strategy you have to understand how to use order traps to your advantage, you have to know what they are and how to identify them.
Order Trap ( Stop Hunting, Fakeouts ) are terms used in technical analysis to refer to a situation in which a trader enters into a position in anticipation of a future transaction signal or price movement, but the signal or movement never develops and the asset moves in the opposite direction.
Order Traps are when a trader puts on a position expecting it to move in a direction and it fails to do so.
Stop Hunting happen when many traders plan their exit by offsetting orders to make sure their potential losses are limited
Stop Hunting can cause considerable losses for a technical analyst. These traders will typically rely on well-tested patterns, multiple affirmations of an indicator, and specific allowances to protect from significant losses. Sometimes the setup can look perfect, but outside factors can cause a signal to not develop as planned.
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