Back in the days, the Forex market was much more simple in terms of services and concepts. There were fewer traders, fewer currency pairs, less trading volume, and so on. With the increasing number of users, Forex brokers and the regulatory bodies have addressed the needs of different types of traders and tried to find proper solutions for them. One major problem was the market order, which limits traders to place a buy or sell order only at market price. The challenging side of the market order is that you always have to keep an eye on the market to not miss any trading opportunity. It was very difficult for working people, so this problem has led to the invention of pending orders. However, everything comes with a price. While stop-loss order is very useful for preventing huge losses, a dangerous side effect has emerged: Stop hunting.
What Is Stop Hunting?
Stop hunting is a method generally used by big institutional investors to kick some traders out of their position by lowering the price of an asset to a level where it might be a stop-loss order cluster. While driving prices down and triggering many stop-loss orders, big investors get a chance to find the liquidity they need.
For example, assume that you have a stock, its price is $60.56 now and the support level is supposed to be around $60. If you see the price tends to fall, you will be willing to place a stop-loss order to prevent a huge loss in case of a freefall. Many traders will think like you and probably put a sell order just below $60, let’s say $59.95. The institutional investors know that the price will normally bounce back from the support level and go up. However, this would not affect the stop-losses and they still cannot find a desired level of shares on the market. Therefore, they try to make prices fall by trading or speculation to buy shares coming from the stop-loss orders. Once they achieve it, they can possess the liquidity and manage their funds easily. The most heartbreaking part for retail investors is that the price of the stock usually soars after the institutional investors buy thousands of stock and they cannot benefit because of the lack of open position.
Everyone Knows What Everyone Knows
If you do not want to fall into this trap, you have to realize that institutional investors are more experienced than retail ones. They know how the market thinks and acts. They know the stop-loss clusters are around round numbers usually ending with 0. What you should do is to change your mindset in a way that differs you from the others. Do not place a stop-loss order just below the support level. Consider that your opportunity cost would be more if your stop-loss order is executed and then the prices jump tremendously. Try to set up a solid strategy depending on not only the support level but also your expectations and keep an eye on the news for a sudden change in the market.Share this article