How To Prevent/Avoid Stop Loss Hunting?


Do you feel utterly frustrated when your trade gets stopped, only to witness the market reverse back to your intended position, leaving you with a loss? You aren’t alone – stop hunting is a trading strategy that happens regularly to the detriment of many traders. But how do you avoid becoming a victim of stop loss hunting?

Here are 6 tips to protect yourself from stop loss hunting:

  1. Locate the stop loss orders.
  2. Set your stop loss correctly.
  3. Leverage the stop hunting strategy.
  4. Allow your trades room to breathe.
  5. Don’t use round number prices when setting your stop losses.
  6. Prepare a re-entry strategy for missed trades.

If you feel that you experience stop loss hunting far too often, read on to discover tips and tricks to help you prevent or avoid it altogether.

6 Tips To Protect Yourself From Stop Loss Hunting

Described below are six ways to protect your trades from stop loss hunting:

Locate the Stop Loss Orders

Large investors rely on stop loss orders to push their positions to profitability. Upon viewing many stop loss orders clustered around the same price level, the market movers push the market through the orders, forcing the traders out of their positions. 

Once triggered, stop loss orders change to market orders, creating volatile and fast-moving markets that allow large investors to make quick wins. After completing the stop hunt, the investors close out their positions, and the market trend reverses.

Unfortunately, you will only realize you have been stop hunted when you notice a false breakout of support/resistance and prices reversing swiftly. 

To reduce the risk of your trade being stop hunted, locate the stop orders by identifying cluster areas on the charts. Once you figure out the most likely position for other traders to place their stop losses, you can then move on to the next step.  

Set Your Stop Loss Correctly

The goal of every trader is to make the most money while taking the least amount of risk. Unfortunately, one reason your stop loss gets hunted is if you usually set the stop too close or too tight, thereby heightening the chances of your stop getting triggered.

Ideally, you should place your stops at a price that the premise of the trade gets negated or becomes invalid if you get stopped.

Another reason could be that you typically place your stops at the same place as every other trader. 

When most traders get stop-hunted or have their stops triggered, they often feel like the markets are conspiring against them or their brokers are trading against them. This is because stop loss hunting usually occurs under the orchestration of large institutional investors capable of influencing market direction, as noted earlier.

That being said, it’s important to note that markets usually hunt for liquidity. Since big players cannot enter a trade instantly, they build their position gradually through hunting for liquidity. And stop loss orders provide the best way to acquire it.

Therefore, when many stops get placed at one point, a flurry of buying activity occurs here, and it’s easier to get stop hunted. What this means is that you need to learn how to stay ahead of the trade. For instance, when you enter a trade, try setting your stop at a much higher or lower level than usual to avoid your stop getting triggered.

To set your stop loss properly, try using the following techniques:

  • Avoid placing the stop loss immediately below support or slightly above resistance. This is where most traders set their stop losses. Thus, setting your stop in either position prompts market makers to push the price here as it gives their trades better entries or exits. To avoid this, place your stop a little further away from either of the two positions.
  • Avoid setting your stop loss randomly or based on a certain percentage or dollar amount you’re ready to lose. Instead, place your stop loss at such a level that, if triggered, it renders your initial trading setup invalid. In other words, if the trade price reaches your stop loss location, your trading idea would be deemed incorrect, and you’d need to get out of the trade.

Here’s a short video explaining how to go about setting an effective stop loss:

Leverage the Stop Hunting Strategy

While you might not have the capital to impact the markets, triggering other investors’ stop losses, you can still leverage this circumstance. You can do this by entering your trades after other traders get stopped out. For instance:

  • If the market is heading towards an obvious resistance level, allow it to trade above the level, thus triggering the stop losses.
  • If the price trades beyond the stop level, await a strong price rejection, then go short on the next candle. 

While using this strategy, you’ll need to consider factors like where to set your stop loss, when to take profit, and how much to risk per trade.

Allow Your Trades the Room To Breathe

Another effective strategy to help you avoid stop loss hunting is making sure you don’t place your stop loss too close. This is because normal market rhythms and stop hunting attempts might catch you.

To establish the market’s rhythm, use the average true range (ATR) indicator to set your stop-loss far from support levels. Most traders base their stop losses on candlesticks, but ATR offers a more cautious method to cut your losses.

The ATR denotes the average price range over a specific period. Therefore, by applying the indicator to your chart bottom for 2 weeks, you can gain a sense of the average movements for the period.

If your stop loss cannot withstand ATR value for a given period, it means that there’s a high likelihood that you’re placing your stop loss too tightly. When the market is extremely volatile, the ATR increases. This implies that you’d need to reduce the size of your position to take the trade with the same percentage of risk.

Don’t Use Round Number Prices When Setting Your Stop Losses

Most traders prefer to place their stop losses around round numbers, as it makes it easier to recall where they set their risk later on. Bearing this in mind and recognizing that round numbers might be prone to stop hunting, set your stop loss much further away. This will keep you protected and prevent you from falling victim to stop hunting. 

You might also want to avoid:

  • Opening your positions just before the release of important news.
  • Using a market maker broker. Instead, opt for a broker licensed by a reputable regulatory agency.
  • Taking decisive action prior to the confirmation of the Price Action.

Prepare a Re-Entry Strategy for Missed Trades

Having a strategy to re-enter the market when you get stopped out or miss a trade can be pretty helpful. This is because a re-entry strategy enables you to take a similar trade or one with a much higher probability than your original trade. 

To carry out this strategy, you can either use a different trade setup or employ the same setup and wait until that particular trade opportunity reappears.

Conclusion

Stop loss hunting is a trading strategy employed by large investors to realize short-term gains. Using their substantial financial backing, they propel the market towards a cluster of stop-losses, forcing small-time investors out of their trade positions. 

But you don’t have to keep accepting losing trades. While you might not be able to prevent or avoid stop loss hunting entirely, there are several things you can do to reduce the incidences. Follow the valuable tips discussed here, and you will not only reduce your chances of being stop hunted, but with time, you’ll also become a better trader. 

  1. Determining where to set your stop-loss. (n.d.). Investopedia. https://www.investopedia.com/ask/answers/030915/how-do-i-determine-where-set-my-stop-loss.asp
  2. Investor bulletin: Stop, stop-limit, and trailing stop orders. (2017, July 13). SEC.gov. https://www.sec.gov/oiea/investor-alerts-bulletins/ib_stoporders.html
  3. Shaw, R. (2010, October 2). The dark side of stop loss orders. SeekingAlpha. https://seekingalpha.com/article/228051-the-dark-side-of-stop-loss-orders
  4. Stop hunting. (n.d.). Investopedia. https://www.investopedia.com/terms/s/stophunting.asp
  5. Stop order. (n.d.). Investor.gov. https://www.investor.gov/introduction-investing/investing-basics/glossary/stop-order

Navdeep Singh

Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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