Brief
- Stop hunting is a trading method in which volume and price activity on either side of support and resistance threatens to activate the stops.
- As more orders enter the market, the price movement becomes more unstable when stops are activated.
- Traders might take advantage of the volatility by opening a long account at a bargain or piling into a short position.
Stop hunting is not something that the average trader can do. Stop hunting is generally triggered by whales with the resources to push a price in a defined way to activate stop-loss orders. How do they do it? They purchase or sell a big quantity of the item in hand, and they do so rapidly. Following the execution of a block of stop-loss orders as market orders, the asset's price is effectively moved farther in the desired direction, causing considerable volatility for a short period of time. Stop hunting is particularly effective in leveraged markets, where traders can trade with borrowed funds. During a stop hunt, it's usual for leveraged traders to get liquidated.
Stop-Loss Orders and Stop Hunting
Stop-loss orders are harder to execute than regular market or limit orders. An investor will put a stop-loss order with their broker to sell an asset when it hits a specific price.
Example: If you own shares of “ABC” Corp which trade at $200, and you want to protect yourself against a substantial drop, one option is to place a stop-loss order to sell your ABC holdings at $190. Your stop-loss order will activate and change into a market order if ABC falls below $190. Your ABC positions would be liquidated at the best price available. Stop-loss orders are used to limit the amount of money that an investor can lose on a long or short position.
Finding Stop-Loss Orders
Stop hunting is a fairly simple process. Every currency with sufficient market size will trade with support and resistance in a rather defined trade zone. Stop losses on the downside tend to be crowded in a narrow range just under resistance, whereas stop losses on the upside seem to be grouped just over support. Due to their market impact, significantly bigger traders attempting to join or exit a position might change the volatility with volume trades that result in stop hunting.
Increased volume with a clear direct thrust will typically indicate this on the charts. For instance, before breaking through, the price movement may ricochet twice off support from the growing volume. Minor players take advantage of stop hunting activity to benefit from the short-term volatility it induces. You can partake in the downward stop hunting with a short position or deem it a chance to begin a long position at a price lower than the current price, based on your method and signals.
How to Avoid Getting Stop Hunted
The simplest approach to avoid a stop hunt is to avoid them altogether. Stop hunts often occur at known support and resistance levels, therefore simply not opening a position at a support or resistance level before obtaining confirmation is a proven way of avoiding a stop hunt.
Another strategy to prevent being trapped in a stop hunt is to take cryptocurrency volatility into account when placing stop-loss orders. A single person in the cryptocurrency market can have a significant impact on the market – this is especially true for low-cap altcoins. It's critical to account for this market characteristic by using correct stop losses.
A 1% stop loss may be appropriate for BTC but not for a lesser cap cryptocurrency. Essentially, a stop hunt is a technique that moves prices in a specific direction to set off a chain of stop-loss orders. Larger players use it to force lesser players out of their spots.
To lessen the risk of being stop hunted, trade more cautiously by waiting for verification and employing a good stop loss technique that is compatible with the commodity in consideration. Always do your research and trade at your own risk.
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