What it means
A stop-loss order is an instruction to sell (or buy back) automatically if the price reaches a set level, in order to limit a loss. Traders tend to place these stops at obvious levels, such as just below a recent low or just above a recent high.
These clusters of orders create a pool of potential trades waiting at known prices. The stop hunting claim is that large participants, such as dealers or big funds, can push the price just far enough to trigger the cluster.
The triggered orders become market orders, which pile into the market and move the price further. After that, the price is said to snap back, leaving the stopped-out traders with losses.
Whether this is deliberate manipulation or a natural feature of markets is debated. Prices often move to places where there is a lot of trading interest, because that is where large orders can be filled with less impact.
A sharp move through a popular level followed by a reversal can therefore look like a hunt even when no one planned it. Deliberately moving prices to trigger orders in order to profit would amount to market manipulation in most regulated markets, and regulators investigate suspected cases.
In practice, proving intent is very difficult, and the allegation is most often made about foreign exchange, commodities and leveraged retail products where trading is less transparent. A business with trading activities should be aware of the risk, even if the evidence is mixed.
There are sensible ways to reduce the damage. Place stops at levels that make sense for the trade rather than at obvious round numbers, size positions so that a normal swing does not force an exit, and consider alternatives such as mental stops or alerts.
Those habits help whether or not hunting is real.
In practice
Real-world examples.
Example
A currency trader holds a long position in the euro against the dollar with a stop just below a round number. A brief spike down triggers the stop at a loss, and the price then recovers within minutes. She wonders if she was hunted, and she moves her stop further away in future.
Example
A commodities trader notices that gold often dips through a recent low in thin overnight trading and then rebounds. He now waits for a candle to close beyond the level before acting. The change reduces the number of times he is stopped out by short spikes.
Example
A retail brokerage investigates complaints from clients that prices on its platform spike through stop levels. It compares its quotes with those of other providers and finds no difference, and it publishes the comparison. The check reassures regulators and clients that the platform is not distorting prices.
Case study
Seen in the real world.
Marlowe Trading Desk is an illustrative, fictional small proprietary trading firm. Its risk manager notices that a quarter of its stop-outs happen within five minutes of a sharp move through a round-number level, followed by a reversal.
She reviews 200 trades and finds that the stops were placed exactly 10 points below recent lows, where many other traders also place them. By moving stops to a distance based on normal daily movement, such as one and a half times the average daily range, the firm cuts its stop-outs by about a third.
The illustrative lesson is that the firm cannot prove that anyone was hunting its stops, yet it can control where its own stops sit. Better placement avoids the crowded levels, saves money and does not depend on settling the debate.
Watch out
Common mistakes.
- Blaming every loss on stop hunting, when ordinary volatility is a much more common reason for being stopped out.
- Placing stops at obvious round numbers or exactly below the last low, where many other traders have also placed theirs.
- Removing the stop altogether to avoid being hunted, which exposes the trader to a much larger loss if the market moves against them.
Questions
People also ask.
Is stop hunting illegal?
Deliberately moving a price to trigger orders and profit from them can be market manipulation, but proving intent is hard, and many price spikes have innocent explanations.
How can I protect myself from stop hunting?
Place stops based on the instrument's normal volatility rather than at obvious levels, keep position sizes modest, and consider using alerts or guaranteed stops where offered.
Does stop hunting happen in all markets?
It is mostly alleged in less transparent and highly leveraged markets such as foreign exchange and contracts for difference, and less often in large, well-monitored share markets.
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