Stop hunting is one of the strategies used by short-term investors to propel their positions to bigger profits. As a rule, stop hunt trading is an approach applied by larger traders with a bigger capital, which also means larger investment opportunities and enough room for maneuver.
The main idea is to push smaller traders out of an underlying position. As a result, bigger investors can benefit from extra momentum and profit opportunities behind each trade. The strategy is based on using stop-loss orders.
The idea is to force them to convert into market orders once triggered. As a result, it creates the situation of a fast-moving market letting stock, and crypto whales take advantage of a quicker and bigger win.
In this article, we will explain how stop hunting works on several markets including trading as well as major signs of a trader being stop hunted by whales.
Unlike the majority of other strategies where traders rely on specific indicators, analytic tools, and market insights, stop hunt trading is a different approach. It depicts the attempt of bigger investors to force weaker market participants away from their positions. To do so, they generally drive the price of the underlying asset to a level, when the majority of stop-loss orders are triggered.
The strategy results in creating higher market volatility offering more unique opportunities for traders used to execute orders under these specific market conditions.
Here are some main factors that define stop hunting in day trading:
The concept can be used practically in any financial market. The only condition is that it can be applied to day trading within shorter timeframes. Crypto, and stock traders use it to benefit from more beneficial trading opportunities.
The concept is generally targeted at assets that are likely to make sharp and unexpected moves, especially when individuals place too many stop-loss orders. Its main mission is to reach the highest possible volatility, as it provides more trading opportunities no matter if you plan to open a long position or go short.
Stop hunting example: let’s say, company A is trading stocks at $50. Investors believe the price will go lower in the short run. Naturally, the majority of market participants will place a stop-loss order at $49,99 to save their capital. Oppositely, bigger traders expect the flood of traders to go short on these stocks after the price heads below $50. It will force the value to move even lower, letting whales take advantage of the further decline or even bullish positions as they expect the price to bounce back to the previous range.
The strategy is not that simple. It is not just about picking any stop-loss order you can spot in the market. At the same time, the approach is quite straightforward. It does not require specific training or skills. All you need is to have a big enough capital and the ability to locate proper stop-loss orders. To detect them, traders need to do the following:
It is quite easy to identify stop hunt trading on a chart. If you look at a chart and see a volume increase featuring an asset moving clearly in a pushed direction, it can be a signal to stop hunting.
Generally, smaller traders never know they are stop hunted. The situation becomes clear only after it actually happens or post facto. The major evidence of one being stop hunted is the false support and resistance breakout, where you can watch the price swiftly reversing.
Apart from a false breakout, you will probably observe a growing traded volume, as whales are pushing the market and adding price action and volume to it. Another obvious sign of a stop hunt involves multiple stop-loss orders triggered simultaneously and quickly converted into sell orders.
When the price eventually reverses, bigger players are likely to close their short positions, which will inevitably increase buying pressure on the market. The key challenge here is that smaller traders may find it hard to navigate these market conditions, as they occur very fast featuring extreme volatility.
Stop hunting is a technique implemented by bigger traders in an effort to search for bigger short-term gains and push smaller participants off their positions. The idea is to trigger the majority of stop-loss orders by shifting the price and volume. It leads to a wider option for long and short positions for so-called whales.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.