Why professional forex traders hunt for stop orders
Stop hunting is a forex trading strategy where traders try to move the market to trigger stop-loss orders. Traders use stop-loss orders to exit their losing positions should a specified price be touched. When stop-loss orders are triggered, the market can move quickly in one direction.
Stop hunting is an advanced short-term trading strategy that can be very profitable when used correctly. This strategy takes experience to understand the market and forecast how other traders will act. Large players, such as banks or institutional traders, usually are the players who trigger stops. Smaller traders can not move the market, but they can use similar strategies by copying larger traders.
Stop hunting can cause significant losses for traders caught off guard by sudden market movements. Therefore all traders should be aware of this strategy to protect their trades. However, some people view stop-loss hunting as manipulative and unfair to traders, so it is a controversial strategy.
Professional traders look for opportunities when the market is quiet to use a stop-hunting strategy as it can be easier to move the market in their favored direction. The stop-hunting strategy is popular during a public holiday when the forex market is still open and early in the Asian morning, before 9 am Tokyo time, when few traders are watching the market.
How to forecast stop loss levels
Many traders use similar strategies as they have learned to trade from the same books and videos. Many trading books will suggest traders exit their long positions should the market fall below support or short position above resistance. The more obvious the support and resistance level, the more likely there are many stop-loss orders close by. Following traders' actions through Twitter, blogs, and talking with others makes it possible to understand where stop-loss orders are likely to be placed.
Stop hunting strategies
Trade before stop-loss orders
In this strategy, traders will buy ahead of resistance or sell ahead of support. After the stops are triggered and the panic has subsided, the stop-hunting traders will exit with a profit. An example is if there is significant resistance at 130.00 and many traders have sold ahead of the resistance level. Should the market trade above 130.00 at 130.05, then those traders who sold will look to buy back their position to limit their losses. Large traders will look to buy before 130.00, starting at 129.90, for instance, and keep buying until they can push prices to 130.05. Once the stops are triggered at 130.05, the market could rally very quickly to 130.15, for instance, where the stop hunters can exit for a quick profit.
Trade after stop-loss orders
After the stop-loss orders are finished, the market will usually reverse direction. Traders look for opportunities where the market has panicked to enter a reversal position following a move above resistance or below support. For instance, the market rose quickly to 130.15 after buy stop loss orders at 130.05; this could present a selling opportunity if there were no fundamental reason for the price move.
Stop hunting risk management
Hunting for stop-loss orders can be a dangerous strategy should it fail, so risk management is vital. As this is a momentum strategy, a small stop loss, and a large target is best, for instance, a 5 pip stop and 10 pip target or larger when trading forex. Should the market fail to rise above resistance, then prices can quickly reverse, so reducing your stop loss if prices fail at resistance will increase your profitability. Prices can move rapidly around important support and resistance, so have a clear plan of where you will exit at all times.
Stop hunting mental control
Stop hunting can be stressful as it can be hard to forecast when large traders will hunt for the stop loss orders. Like with any other strategy, there is no guarantee of profits, so go into the trade prepared to lose. Due to the potential speed of market moves when stop-loss orders staying calm is vital at all times.