Have You Been A Victim Of Stop Loss Hunting?

From here

Today I’d like to talk to you about stop hunting. And I want to thank reader, Russ, for dropping me a note to spur me on to this piece.
Russ and I agree on two key points.
One: You should always have a stop loss.
Two: we both know stop hunting is not just a ‘bogeyman’ myth to scare traders. It really exists and can trip up your trading.
Question: Has this ever happened to you? You get stopped out of a trade… only to see the market reverse right afterwards and move in the direction you predicted?
Chances are, you’ve been the victim of stop loss hunting. And it happens all the time.
The good thing is, there are a few tricks you can play to try and help you avoid it. And it’s those I want to talk about today.

How brokers steal your pips

Stop hunting is pretty simple. It’s an easy way for a market maker, broker or financial institution to make a nice tidy sum scalping some profit at your expense.
If they know where the orders are in the market, they can target key areas of bunched up retail orders (e.g. you and me) in order to make a small amount of profit.
Once those stops are hit, the big player can then make the market move in the direction retail traders were placed originally.
This is dead easy for them as they can directly see where orders are placed in the market. Easy money.

Now these guys are never going to go after your single stop on its own. But if enough retail traders all place their stops in the same place, it’s easy pickings.
However, there are a couple of tips for how to avoid this.

1. Stop placing stops on round numbers.
It may look neat and tidy, but stop bunching stops on large round numbers. Anything ending in two or more zeros is a definitely no-no.


2. Everyone looks for swing highs and lows.
These are the highs and lows over a given period. It’s a really common place to stick stops exactly (or even within a pip or two) of swing highs and lows.
So you should always ensure that your stop is placed above this (if you’re short) or below (if long), with enough room to breathe.
I know you’ll want me to be more precise. But it will depend on your stop strategy. We’ll come back to this in more detail and look at specific strategies another time, though.
For today, let’s get on to the good stuff and something Russ also pointed out.
Let’s assume markets are in a downtrend. We get a retracement and price moves up.
Look at where retail trader stops are likely to be for those trying to trade the down turn. You can almost bet money that market makers, financial institutions or smart money will be looking for that level.
They want to clear those stops out and give themselves a great price. Then the market will drop back down again.
It’s a trick many traders use, and a great way to get a nice entry price. Let me show you.
Put your short limit order (assuming a downtrend) just at the beginning of where the orders are likely to be placed.
Then, instead of sticking your stop in amongst all the other retail traders, stick it higher up, but complying with the rules above.
To see what I mean, have a look at the chart below of a trade I did personally. I was shorting the Aussie dollar. My stop was at 1.05067 exactly – above the bunched orders. My entry on the trade was 1.0480. 

See that big circle? By that time, I already knew it was a key level because of the previous move lower from it (back on 27 March).
This time it tests, pulls back from the pivot line and then pops higher to break that level and test stops. It knocks a lot of those stops out and we get a dimple in the order book (you can see it in the indicator at the bottom – that small circle).
Then the price hovers as a few retail buyers step in to go long on a “breakout”-style strategy. And then it drops.
The instant reversal of the pop higher was a big clue and it only found minor support for buyers once it had broken that level.
And then it gave way.
So a nice trick for finding an entry point. And it can be a great little way to capture a decent move.

A few key areas to look out for

• Swing Highs and Lows; lots of orders are bunched at these.
• Round numbers.
• Exactly on pivot lines (or exactly 5/10 pips above or below).
• Exactly on Fibonacci retracement levels.
• Any points which hit multiples of these.
At these areas, we start to get bunching of orders and stops. So think about how you can use them to your advantage.
Another way to find out is to check out some of the pro traders on Twitter or in a Live Trading Room. They will often let people know of order book positions as most of them will have access to a feed or an order book to give you a view.
Follow these guys for a while and get a sense of whether they are accurate, and you’ll get some valuable trading insights.