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Let me ask you…
Have you ever taken a loss only to see the market reverse back to your intended direction?
And you can’t help but feel that “someone” is stop hunting you.
The world is unfair.
The market is rigged.
But is that really the case?
Or did you put your stop loss at the worst possible level — which makes it easy to get stop hunted?
If that sounds like you, don’t worry.
Because in this post, you’ll learn:
- What is stop hunting
- Does your broker hunt your stop loss (it’s not what you think)
- How the smart money hunts your stop loss
- How to set a proper stop loss and avoid stop hunting
- A Forex stop hunting strategy
Then let’s begin…
You might wonder:
“What is stop hunting?”
Well, it’s a term often used by losing traders who got get stopped out of their trades, only to see the market reverse back in their intended direction.
Why do I say losing traders?
Because only losing traders blame the market, their broker, the smart money, and everything else — besides themselves.
And this is a big problem!
If you blame others, it means you’re not taking 100% responsibility.
If you don’t take 100% responsibility, you are giving up your power to change.
If you give up the power to change, you’ll never improve for the better.
Here’s the deal:
You don’t see winning traders complain they are getting stop hunted.
Because they take 100% responsibility for their actions!
The first step to avoid getting stop hunted is to take 100% responsibility — and only then can you become a better trader.
Now, let’s move on and answer a burning question that’s on your mind…
Most regulated brokers don’t hunt your stop loss because it’s not worth the risk.
Think about this:
If the word gets out that ABC broker hunts their client stops loss, it’s only a matter of time before existing clients pull out of their account and join a new broker.
If you are a broker, would you want to risk doing that over a few measly pips?
I guess not.
Most brokers don’t hunt your stops as the risk far outweighs the reward.
Now, you are probably thinking…
“But my broker widens the spread and stops me out of my trade.”
There is a reason for this. Let me explain…
A broker widens their spreads during major news release because the futures market (which they hedge their positions in) has low liquidity during this period.
If you look at the depth of market (aka the order flow), you’ll notice the bids and offers are thin just before major news release (like NFP) because the “players” in the market are pulling out their orders ahead of the news release.
Thus, you get thin liquidity during such period which results in a wider spread.
And because of this, the spreads in spot forex is widened (because if it isn’t, there will be arbitraging opportunities).
So, it’s not that your broker is widening their spread for fun, but they are doing it to protect themselves.
The bottom line is this…
Most brokers don’t hunt your stop loss because it’s bad for business in the long run. And they widen the spreads during major news release because the futures market is thin during this period.
Here’s the thing:
The market is to facilitate transactions between buyers and sellers. The more efficient buyers and sellers transact, the more efficient the market will be, which leads to greater liquidity (the ease of which buying/selling can occur without moving the markets).
If you are a retail trader, liquidity is hardly an issue for you since your size is small. But for an institution, liquidity becomes the main concern.
You manage a hedge fund and you want to buy 1 million shares of ABC stock. You know Support is at $100 and ABC stock is trading at $110. If you were to enter the market you will likely push the price higher and get filled at an average price of $115. That’s $5 higher than the current price.
So what do you do?
Well, you know $100 is an area of Support, and chances are, there will be a cluster of stop-loss underneath (from traders who are long ABC stock).
So, if you can push price lower to trigger these stops, there will be a flood of sell orders hitting the market (as traders who are long will exit their losing position).
With the amount of selling pressure coming in, you could buy your 1 million shares of ABC stock from these traders. This gives you a better entry price, instead of hitting the market and suffer a slippage of $5.
In other words, if an institution wants to long the markets with minimal slippage, they tend to place a sell order to trigger nearby stop losses.
This allows them to buy from traders cutting their losses, which offers them a more favorable entry price. Go look at your charts and you’ll often see the market taking out the lows of Support, only to trade higher subsequently.
Now, let’s move on to something really important…
Here’s the deal:
There’s no way to avoid stop hunting completely because that’s like saying “how do I avoid losses entirely?”
The market goes where it wants to go and all you can do is participate in the move and cut your loss when you’re wrong.
You want to set a proper stop loss so you don’t get stopped out “too early”.
Here are 3 techniques you can use:
- Don’t place your stop loss just below Support (or above Resistance)
- Don’t place your stop loss at an arbitrary level
- Set your stop loss at a level where it invalidates your trading setup
Let me explain…
1. Don’t place your stop loss just below Support (or above Resistance)
Now it’s clear to you that setting your stop loss just below Support (or above Resistance) is a bad idea.
Because that’s where most traders place their stop loss.
And this incentivizes the smart money to push the price to that area as it offers them better entries & exits on their trades.
You’re probably wondering:
“So, how should I set my stop loss?”
You should set your stop loss a distance away from Support/Resistance.
For example: You can use the Average True Range (ATR) indicator to decide how much “buffer” you want to give.
It can be 1 ATR, 2 ATR, or even 3 ATR away from Support & Resistance area.
If you want to learn how to use the ATR indicator to set your stop loss, then go watch this video below…
2. Don’t place your stop loss at an arbitrary level
Most traders are fixated with the perfect entry, trying to nail the absolute top and bottom in the markets.
But when it comes to placing your stop loss… where do you put?
At an arbitrary level. What the f***, seriously.
You do it because it’s the “right” thing to do — to apply proper risk management.
So you place your stop loss in the most convenient way possible. Perhaps it’s 50pips, or maybe 100 pips, or even 200 pips.
But here’s the deal:
The market doesn’t care where you put your stop loss. It moves from an area of liquidity to the next area of liquidity, and if you place your stop loss at a random level — it will get eaten alive.
Now you’re probably wondering:
“So Rayner, how should I set my stop loss?”
The general rule is this…
You should set your stop loss at a level which invalidates your trading setup. I’ll explain more in the next section.
3. Set your stop loss at a level where it invalidates your trading setup
Here’s the thing:
Whenever you enter a trade, it’s probably based on a technical pattern (like breakout, pullbacks, and etc.).
So, it makes sense that your stop loss should be at a level that makes your technical pattern invalidated.
If you’re trading a breakout, then your stop loss will be at a level where if the price reaches it, the breakout has failed.
If you’re trading a pullback, then your stop loss will be at a level where if the price reaches it, the pullback has failed.
If you’re trading chart patterns, then your stop loss will be at a level where if the price reaches it, the chart pattern has failed.
Now go watch this video below where I’ll explain it to you step by step…
And once you’ve defined a proper stop loss, the next thing is to apply proper position sizing so you don’t lose a huge chunk of capital — even if you’re wrong on the trade.
If you want to learn more, go read The Complete Guide to Risk Management and Position Sizing.
Here’s the truth:
You probably don’t have enough capital to push the markets and trigger other trader’s stop losses.
Still, you can take advantage of this phenomenon and enter your trades after they get stopped out.
- If the market is approaching an obvious Resistance level, then let it trade above it (and trigger the stop losses)
- If the price trades above the level, then wait for a strong price rejection
- If there’s a strong rejection, then go short on the next candle
- And vice versa for long
Now that you’ve learned the Forex stop hunting strategy, you must also consider…
- Where will you put your stop loss?
- Where will you take profit?
- How much will you risk per trade?
- How will you manage your trade?
- Which markets will you trade?
These are important considerations that must be part of your trading plan.
Frequently asked questions
#1: But I won’t get stop hunted if I don’t put a stop loss at all, isn’t it?
Yes, you won’t get stop hunted if you don’t put a stop loss.
But if the market reverses against you such that you don’t have enough margin to support your existing position, you risk losing your entire trading account.
#2: What % of your trading account do you risk per trade usually?
I usually risk not more than 1% on each trade.
#3: If I use a smaller position size in order to have a wider stop loss, then wouldn’t my gains be rather small each time?
Yes, your gains will be smaller since the market needs to move more in your favour to earn a certain dollar value.
However, the upside is that your losses will be contained – which is key to staying in this business.
You want to control your losses instead of worrying about how much you can potentially make. Why? Because when you’re trading with an edge, eventually, you can scale up the size of your trading account and that would increase the dollar value of your trades.
So here’s what you’ve learned today:
- What is stop hunting and why losing traders suffer from it
- The truth behind whether your broker trades against you, or not
- How the smart money hunts your stop loss and how to avoid it
- My 3 practical techniques to help you avoid stop hunting
- A Forex stop hunting strategy that works
Now here’s a question for you…
How do you avoid stop hunting?
Leave a comment below and let me know your thoughts.