You have possibly seen it stated in different forums of trading. It might have happened to you also. It is enough to make the head explode. What it is? It is known as Stop Hunting.
Here is a trading situation. You are convinced that the EUR/USD is moving up. You have made an entry into the long position at nearly 123.40 and you have set the stop at about 123.05, slightly under a clear double bottom. You fix the initial target at nearly 124.50, offering over the ratio of 3:1 of reward to the risk. Unluckily, the trade starts to move against one and breaks with the help of the support. The stop is popular and you are generally out of the deal. You will be surely glad to have this stop in its place. Who realizes how far it will drop which has broken the support, right?
It is absolutely wrong.
Make a guess about things that will happen next. After taking your stop, the cost turns right around and heads in a north direction, just as one thinks it will be actually. As one watch from sidelines, pair shifts past 124.00, and then one never looks back. Let me tell you about one of my latest trading opportunities. Depending on the statistical trading equipment that I utilized, I experienced a shortage of USD/AUD at nearly 0.7530 and places the stop up at about 0.7570 that was over local top. Within a single day, the cost spiked, took the stop and then it moved into a consolidation apace at nearly 0.7540.
Due to the last spike, you will find nearly two local high in the trading chart about 0.7570. There is nothing to be discouraged from my deal, I again entered the short place in an area of 0.7530 and by the time I put a stop at nearly 0.7580, just over last spike. What are the probabilities that cost will break with the help of resistance? Well, as it moved on, this is the thing that happened. The cost spiked up and also hit the stop, knocking one out of a deal for second time. More frustrating is when the stop was hit, cost turned down again in a direction I anticipated originally.
However, I was not paranoid enough to realize that someone was precisely choosing the stop orders. At first, my deals were so few that nobody bothered about trying to choose them and secondly, I accomplished these types of trades in the practice demo account. I challenge I was not the only one who dunderhead putting the stops in that specific position over the latest highs. There were possibly quite few purchase-stop orders during the cost area and it looked like one was gunning from the stops.
Therefore, what’s the stop hunter and what is all the stuff about selecting the off stop orders? Stop hunter is the market player that makes an attempt to trigger a stop order for their own advantage. Generally, they have the ability to shift the trading market by small degree. Stop hunter might be the dealing desk of the Forex broker which is dealing in compensation or it might simply be the big player in a trading market, hedge cash or a bank.
Stop hunters operate in the best manner in a surrounding where most of the dealers believe that the trading market is regarding the shifts in certain direction. As the traders take certain positions, an inexperienced person will place the stops at obvious locations for reducing the losses if cost moves in any other direction. Stop hunters realize where amateurs are possibly placing these types of stops therefore they try their level best to shift the trading market in order to start them. It might permit a stop hunter for making an entry into trading at a good cost before the trading market starts moving in a direction that every person expects.
For instance, in the short trade mentioned above, there were several indicators that the trading market heads down. Stop hunters realize that large number of traders have taken small positions and had possibly positioned their purchase-stops at nearly an area of 0.7570. Therefore, they ensued to push the cost nearly 0.7570 and at the time when the bus-stop order was started, you should make a guess from whom I was purchasing from? Now, as I came out of the trading market and as they had acquired small position at a cost forty pips over where I made an entry. I also had 40 pip losses while they made an entry at a cost that was nearly 40 pips improved than it was otherwise.
Note that the situation in which all expected the trading market to move would work in a contradictory fashion. Amateurs will have sell stops at certain point under the trading market and stop hunters will push the trading market down for triggering selling stop orders. Amateurs will be selling their several long positions in panic while stop hunters were purchasing at great costs. The kind of stop hunting which I have just explained is utilized in situations where the participants of the market expect the cost to shift in a specific direction. In this particular situation, savvy stop amateurs and hunters have the similar market opinion. Stop hunters just try to take over positions of amateurs at a perfect cost.
You will also come across another situation where the stop hunters tries to shift the market towards a collection of stops with a hope that triggers the stops will impulse the trading market in the similar way, therefore triggering more stops and henceforth a snowball effect. It is how certain temporary rallies and panics are developed. In such a case, stop hunters take certain positions in an opposite direction from amateurs and are only trying to activate the stops to attain amateurs to panic.