In the world of trading, knowledge is power, and being aware of the strategies employed by market manipulators can be the key to safeguarding your capital. One such manipulative practice is stop hunting, which targets stop-loss orders in an attempt to drive prices in a particular direction.
Recognising stop hunting is tricky, as it typically occurs behind the scenes. However, there are some signs to watch out for that may indicate that a stop-loss raid is taking place.
While it is important to be aware of the potential risks of stop hunting, there are steps you can take to avoid being targeted by this practice. One of the most effective ways to protect yourself from stop hunting is to use stop-loss orders strategically.
Here are some strategies you can use to avoid stop hunting:
🔸Strategy 1: Identifying Areas of Stop-Loss Orders
One way to avoid being targeted by stop hunting is to identify areas where there are likely to be a large number of stop-loss orders. You can do this by analysing charts and identifying key support and resistance levels and trendlines. When prices approach these levels, there is often a cluster of these orders placed just below or above these areas.
By identifying these areas, you can avoid placing your stop-loss orders at these key zones. Instead, you can pinpoint levels that aren’t likely to be breached, which may reduce the risk of your orders being targeted by stop raiding. Generally speaking, setting stops above/below areas that caused an impulsive move is a decent place to start.
🔸Strategy 2: Avoid Round Numbers for Stop Losses
Another strategy to avoid stop hunting is to refrain from placing your stop-loss orders at round number prices. For example, if the current price of a stock is $50, you may be tempted to put your stop-loss order at $49 or $51. However, market manipulators may target these levels in order to trigger a wave of selling or buying.
🔸Strategy 3: Use ATR to Measure the Stop-Loss Level
The average true range (ATR) is a technical indicator that can be used to measure the volatility of a security. As the name suggests, ATR is calculated by taking the average of the true range of a security over a specific period of time. Statistically speaking, an asset is unlikely to deviate from its ATR.
By using ATR, you can set your stop-loss orders at a level that considers the security's volatility. This may help you avoid setting your stops too close to the current price, which could make them susceptible to raiding.
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