Did you know that your stop loss order could be the target of market manipulation? So, stop loss hunting could be the main reason for your losses. Is your stop loss often got triggered and executed? Then you must read this article.
As a trader, you probably know that the markets can be tricky. In one trade, you might have taken a considerable profit; in another, you might have lost all your profit due to a sudden price drop. That’s where stop losses come in. They’re a way to limit your losses and protect your capital.
However, you may not know one primary dark side of stop losses. It is stop loss hunting. In this article, I will explain stop loss hunting strategy, how it works, and how to escape from it.
Table of Contents
What Is Stop Loss Hunting?
Stop loss hunting is a strategy some market players use to trigger stop loss orders, drag the price down, and buy them at a lower price.
For example, let’s say you have a long position in a stock at Rs.100 per share. If the price drops, you place a stop loss order at Rs.95 per share to limit your losses. A stop loss hunter might put a sell order at Rs.94 per share, just below the level of your stop loss, to trigger a sell-off that drops the price to Rs.90 per share. Then, they can buy in at a lower price and profit when the price eventually rebounds.
How Does Stop Loss Hunting Work?
Stop loss hunting works because many traders, including you and me, use stop losses to cut our losses and protect our capital from huge losses. When the price drops and triggers a stop loss order, our position is automatically closed out, and we incur a loss.
This selling pressure can cause the price to drop even further, triggering more stop loss orders and pushing the price downward.
Stop loss hunters take advantage of this by placing sell orders just below the level of your existing stop losses. When these orders are triggered, it creates a domino effect that can cause the price to drop rapidly, allowing the hunter to buy in at a lower price.
How to Avoid Stop Loss Hunting
Now that you know what stop loss hunting is, and how it works, you’re probably wondering how to protect yourself from this trap. Here are some tips:
Use Mental Stops
Mental stops are stop loss orders that you keep in your head rather than placing them on the market. This way, stop loss hunters won’t be able to see them and target them. Also, keep the habit of setting an alert because you may miss exiting from trade if you are busy with some other work.
Use Wide Stop Losses
Stop loss hunters typically target stop losses that are close to the market price. By using the wider stop losses, you can avoid being targeted and give your trades more room to breathe.
Use Trailing Stops
Trailing stops are stop loss orders that move with the market price. This way, you can protect your profits while giving your trades room to move.
Also Read: How to set trailing stop loss in zerodha
Avoid Obvious Levels
Stop loss hunters are more likely to target detectable levels such as round numbers or previous lows/highs. By avoiding these levels, you can escape from stop loss hunting.
Conclusion
Stop loss hunting is a natural phenomenon that can significantly impact your trading performance. However, by understanding how market players play with our stop losses and how we can protect our capital, we can minimize our losses and maximize our profits.
Remember to use mental stops and alerts, wide stop losses, trailing stops, and avoid obvious levels to avoid being targeted by stop loss hunters. I hope these tips will be helpful for you. Please keep these tips in your mind and make the trade safely.