Stop hunting is a trading technique by which a dominant market player aims to clear out small players’ positions. They use other traders as liquidity in select price ranges, usually at key technical levels.
An example of this can be seen below with the long wick to the bottom of the chart.
- The stop hunter waits until the price meets a support range(dotted line).
- They suddenly dump massive volume as price is pushed out of the support range(wick).
- The small trader’s stop losses trigger, turning into market sell orders.
- The stop-hunter scoops up the newly thickened order book.
In this scenario, small traders wind up as mere liquidity pools for the dominant traders in the market. They’re able to consolidate positions at lower prices. Although this strategy is not without its risks for the manipulator, it can be very advantageous in times of thin trading volume and with a majority stake.
It’s illegal for major brokers to use their client’s orders to facilitate this strategy. Though we know that many brokers do sell their customer data. Pairing customer orders with a stop-hunting scheme is akin to playing a game of Battleship with a map of your opponents board.
For traders who understand rules aren’t always followed, or for those that trade on unregulated exchanges, a solution is desirable. A second-layer trading software is a good option. Interface it with an exchange’s API and simply plug in the stop loss order as you normally would. Except the signal to sell is only tracked by the second layer software.
This time, the trade just appears as a market-sell order to the exchange/broker when the time comes. They cannot see there was an order waiting to be triggered previously. Or better yet, the stop-hunter cannot see the now large market buy order coming their way, just as they try to sway the market. Sometimes the hunter becomes the hunted.
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