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- Why you need to be aware of Stop Loss Hunting
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- Why you need to be aware of Stop Loss Hunting
- At key moving average levels
- Clear Support and Resistance Levels
- Historical Support and Resistance Levels ie, Multiyear levels
News & analysisNews & analysisStop loss hunting is frustrating, annoying and can be detrimental to any retail trader. The premise of stop hunting is that large systemised institutional trading strategies know where the average retail trader or most traders will set stop losses and therefore profit off triggering these ‘stops. Their own algorithm will then deliberately, trigger the stop losses. For traders there are few things as frustrating as have a well-positioned trade, being stopped out and then watching the price reverse in their original direction of the trade.
What is a stop loss?
Understanding stop loss hunting requires a simple understanding of what a stop loss is. A stop loss is a trigger on traders’ position to close the position at a certain price. Generally, once triggered the position will attempt to be closed at the specified price. Stop losses provide an important role in risk management for many traders. Generally, traders use stops losses to avoid emotional mismanagement and better manage overall risk by having clear exit points for the trade in worst case scenarios.
The second element that is important to understand is where traders put their stop losses and why. Retail traders often place their stop losses near important market structures also known as support and resistance levels. These areas represent strong zones of supply and demand. When support and resistance zones become more and more consistent and more obvious, it can create a clump of stop losses. These stop losses can be thought of as orders that must get filled if the price reaches those points. This creates an attractive opportunity for large institutions with powerful algorithms that can push the price down and generate profits by ‘stopping out’ traders by triggering these stop losses. Once this process has occurred, the price will often move back in the direction the original trades were positioned for.
Why would a system want to trigger stop losses
Firstly, when stop losses are triggered, a price tends to see an increase in relative volatility. Therefore, it may indicate the beginning of a reversal which sophisticated traders profiting. It also allows these large institutions to maximise their own existing trades as it may allow for better entries.
Common areas for where stop hunters will look
Stop Loss hunting tends to be most active around significant and clear areas of support and resistance. This is especially true with regards to commonly traded assets. However, stop loss hunting can occur in all assets with various sizes. A stop hunt can be seen often with a small candlestick and a large wick. In addition, they often occur on very short time frames.
Common Area for Stop Loss Hunting
How to deal with Stop Loss Hunting?
The obvious tactic to deal with stop hunting is to lower the stop loss below the obvious support and resistance level by a factor of maybe 10%. This may require smaller trade size, but overall will allow the trade to hopefully avoid these potential stop losses. Treat support and resistance as areas instead of specific price points. Support and resistance do not exist at one price and rather a range of prices that are supply and demand zones. Therefore, placing stop losses below these ‘zones’ may put the trade out of arm length of stop hunters. Simply being aware of stop loss hunting may provide some reassurance when a sharp spike in price occurs, to remain in the trade and not exit immediately.
Ultimately, Stop Loss Hunting is just another challenge that traders must deal with in the pursuit of profit. However, with some knowledge traders can adequately accommodate these tricky occurrences.
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The information provided is of general nature only and does not take into account your personal objectives, financial situations or needs. Before acting on any information provided, you should consider whether the information is suitable for you and your personal circumstances and if necessary, seek appropriate professional advice. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Past performance is not an indication of future performance. Go Markets Pty Ltd, ABN 85 081 864 039, AFSL 254963 is a CFD issuer, and trading carries significant risks and is not suitable for everyone. You do not own or have any interest in the rights to the underlying assets. You should consider the appropriateness by reviewing our TMD, FSG, PDS and other CFD legal documents to ensure you understand the risks before you invest in CFDs. These documents are available here.
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