Stop hunting is called the practice that consists in forcing the positions of retail traders, causing a movement in the price action, up or down, until the price reaches the levels where stop-loss orders have been placed. This leads to stop losses being executed in such a way that retail traders are expelled from the market while another investor benefits from it. It is a strategy used mainly by large financial institutions that have enough capital to buy and sell and influence market prices.
The fact that traders place their stop loss levels at key points such as supports or resistances, relevant moving averages, Fibonacci levels, or integer figures, allow the stop hunting to be carried out.
In other words, the large market participants extend the price considerably with the sole purpose of activating the automatic protection closures (Stop Loss Orders) of retail traders.
Stop running is a practice in which the market is pushed by large participants (such as large banks or hedge funds) to reach and exceed an important level of support or resistance. Stop loss orders that are placed around that support / resistance level (mostly by retail traders) are activated, which causes the market to move faster in the prevailing direction, so that the price reaches and activate more stop losses that are beyond that level, creating a snowball effect. This causes substantial spikes or falls in prices (spikes in resistance and drops in the supports), which are used by large participants to enter the opposite direction in an advantageous position and generate large movements in the supports/resistances as they were originally anticipated by retail traders who originally placed their stop loss orders.
How do get benefits with stop hunting?
The support and resistance zones defined by the Fibonacci levels can provide traders with easy-to-see buying and selling areas.
The benefits of our trades can increase when a very logical approach is applied to the Fibonacci areas through the observation of a very simple trick that market makers apply, which is dedicated to stop loss hunting ( or stop running) that most traders place in the most known and used price levels, such as Fibonacci levels. This action can produce strong and rapid price movements as we will see below.
On many occasions, large market participants cause this effect thanks to their high monetary resources that allow them to inject high amounts of liquidity into the markets in a short time, which allows them to move prices to price levels where there is a high number of stop-loss orders waiting. The effect of stop running is increased by traders who close their open positions due to panic when the market moves against them.
Regardless of which market we are trading in, it is likely that we have ever been victims of some stop-loss hunt where the price continued to our target price areas. This happens every day in the markets with the highest trading volume.
A simple stop loss hunting in Fibonacci areas can become one of the most profitable operations in both range markets and in trend markets. When Fibonacci resistance and support zones are used properly, the trader is able to easily identify and obtain benefits from this daily phenomenon. Below we show several examples of trades carried out in oil using this approach.
The rules are simple and are described below:
- Buy on the Fibonacci supports once the price has bounced higher and close the position on the Fibonacci resistances. The strength of the signal is reinforced if the price pierced the Fibonacci support temporarily, indicating a possible stop running.
- Sell in the Fibonacci resistances once the price has bounced down and close the position in the Fibonacci supports. The strength of the signal is reinforced if the price pierced the Fibonacci resistance temporarily, indicating a possible stop running.
The profit potential when trading with these support/resistance levels increases greatly when market makers hunt stop loss to produce a stop running in the key Fibonacci areas. We can use additional tools that confirm the price rebound in the Fibonacci support/resistance to serve as filters. Each trader can use the filters that he creates most conveniently. In other words, it is advisable to use rebounds at Fibonacci levels and stop-loss hunting as part of a more complete trading system, and not as a system by itself.
Every day there are multiple opportunities to carry out counter-trend trades of this type in the main markets. This is true both in markets that move in well-defined ranges and in markets that move with strong trends.
We can note that each one of these movements up to the Fibonacci support occurred after a previous pivot with the trend was stopped as a result of the placed stop losses. These areas are exactly where most traders are stopped out due to their stop loss orders and where more experienced traders open their positions.
The use of Fibonacci resistances and supports as a guide is of critical importance to take advantage of stop hunting in order to perform potentially profitable trades. By applying these techniques, the trader may be able to invest easily and effectively “after” the stop runnings have occurred.