Stop hunting

What is stop loss hunting – so-called stop hunting?

A trader begins his adventure with the market by opening an account with a broker and executing his orders. Some experienced traders place defensive orders, which protect open positions from a sudden and violent change in the price of an asset. Then, if the price reaches that point, the broker will automatically close the losing position. Then everything will be under control.

Stop loss hunting is the moment when the price approaches but does not directly touch the hedging order. Brokers intentionally widen the spread at this point, or manipulate the chart in such a way that the trader thinks his position has been rightfully closed at the stop loss level.

Of course, it is worth remembering that this is an increasingly rare practice in the market, especially by brokers regulated in trusted jurisdictions.

Why do brokers use stop losses?

To answer this question, consider the two most popular business models:

• MM (Market Maker) – in this model, the broker does not send orders to the market, but becomes a party to the transaction himself. He uses the quotes of the interbank market, but does not act on it. Often the broker’s actions are motivated by simple mathematics – if the trader loses, he gains.
• ECN (Electronic Communication Network) – in this model the broker is only an intermediary between the trader and the market. Its goal is to present the best conditions for trading to the client.

How to use stop loss?

The basic premise of using a stop loss is not to set it further than the maximum allowable and acceptable loss on a transaction, which depends on the chosen investment strategy and the amount of funds in the investment account.

The action, however, does not just come down to setting the value to which we are able to lose and end there. It must be adjusted to the situation that prevails in the market.

What tools help determine the stop loss ceiling?

Many investors use the S&R model, or support and resistance, for this purpose.

Some traders also use tools like Pivot Points, which operate on the basis of the Fibonacci sequence, and Gann tools, based on William Delbert Gann’s assumptions that price is not everything, and that combinations of information flowing from the price axis and timeline are just as important.

Why use a stop loss?

According to many traders, this is simple and obvious. This allows you not to lose all of your capital, and at the same time allows you to save time by better and clearer planning of actions and setting up axioms.

What is worth keeping in mind when setting a stop loss?

The key is to adjust to the situation on the chart at the time of trading, and to take into account the size of the investment account. Any trading strategy should have rules related to capital management.

This is important because if the stop loss is too wide, the loss from one transaction can be as much as a dozen or tens of percent of the value of the investment account. As a result, you can assume with a high degree of probability that sooner or later you will lose your capital.