An Intro to Stop Hunting
Content:
General Information-
What is a Stop Hunt?
Why do Stop Hunts happen?
Examples
How to use Stop Hunts for your Advantages
Closing Thoughts
General Information-
What is a Stop Hunt?
A stop hunt is a strategy that is used to force out market participants from their positions by pushing the price of an asset to where individuals place their stop losses. When this happens, usually you will see a cascading event take place that creates a big wick of liquidity. An example is shared below to help visualize exactly what it may look like. (Figure A) The reason why a cascade happens is because, as one person's stop gets hit it forces them to sell (which pushes the price down), and then that same selling pushes the price down more which triggers other individuals' stops which then causes a bunch of selling off to occur at once.
Figure A
2. Why do Stop Hunts occur?
Because they want your money…Trading is a very competitive game and there is no sugarcoating this. When you are stopped out of a long/short position in this market, that means someone else made money. Better yet, when they cause a stop hunt, they are stopping a bunch of people out at once which gives them a better opportunity. When I say “them”, I am talking about whales and market makers that move markets. At the end of the day, we are little fish in the middle of big money and we are all trading against each other. Market makers and whales love stop hunting because they will force out traders which will then give them cheaper prices. (This is especially true for leverage trading)
3. Examples
For simplicity's sake, I shared two examples of long/shorts being stop-hunted before the price goes in the opposite direction. As you can see in both examples, there is a wick created in the chart which resembles a cascading event that then leads to a reversion of price. In both scenarios, you would think the price would continue putting pressure in that direction but it turns out to be a trap that was laid out and individuals get baited. Again, this happens because market makes are creating misdirection which creates confused traders that end up building liquidity that they can then flush out. If you look at the $TWT chart you will see two flushes occur, the first one is the initial flush and prices goes up to create more confusion which then creates liquidity to only flush them out again the second time, creating a massive wick before the trend goes up again. Time to talk about how we can use this to our advantage.
4. How to use Stop Hunts for your Advantages
Time to get to the fun stuff. Once you can understand what stop hunts are, you can also understand what to watch out for, here’s what I mean. In the above examples, you saw wicks that were created each time in either direction before the price reverted. So why not WAIT for a stop hunt to occur, THEN take action after the carnage occurs? Let’s take a 3 step approach as shown below. 1) WAIT (as mentioned) for stop hunts to occur 2) Identify key levels in the zone or range of the stop hunt 3) Long/short that key level once identified for the best chance to succeed. Feel free to back-test this strategy on your favorite assets as they stay tried and true with practice. I also want to mention there are MANY ways to use stop hunts to your advantage, but this is one way that works for me.
Figure B
Closing Thoughts
Stop hunting is a very common thing that occurs every single day and it's the nature of the game. The reason why these stop hunts happen is so that market makers and whales can flush out all the liquidity in the market before driving prices in the opposite direction. Most of the time, the people who get stopped out on longs are the same people who end up buying higher. However, if you use my 3-step approach you will be better prepared for a situation if/when it occurs. As someone who has been in this market for 5 years, I have had my fair share of wins/losses but I wish someone mentioned what stop hunting was earlier because it would help me understand what to look out for. Lastly, None of this is financial advice, as it is only meant for educational purposes!