Stop Loss Hunting is a manipulative tool, that is used by Market Makers and Whales to manipulate market every day and to take away money from Retailers.
What is Stop Loss Hunting?
Stop Loss Hunting is a process in which “A KEY LEVEL” is broken on either side in order to trap Retailers and to take Stop losses of either bears or bulls and trap them in that Trade.
How does it work?
It works only when we have a level that is so obvious to everyone that majority of Retailers put there Stop Loss underneath that level. Stop Loss Orders are clearly observable in order Book and especially to Market makers.
However, Key Levels in Range Trading become so obvious to Market makers or some Support levels that Whales/Institutions or Market Makers can clearly observe where most Stop Losses of Majority of Retailers will be. Thus they can overwhelm that range or level with Demand or Supply to take out Bears or Bulls Respectively.
Why does it work?
We all are humans and are bounded by our emotions. We are emotional beings at the end of the day. Inherently, We share an emotional domain and there are two key emotions in that domain :- Fear, Greed. These emotions are involved and determine out actions most of the times in any Financial Market.
Therefore, These emotions are used as trigger points for Buying and selling and thus, Market Makers manipulate the Market by Controlling the masses by using these as Trigger points.
In Bear Trap, when an obvious support level is broken then Retailers sell and Whales/Institutions buy and Bears are trapped. Then market makers Push the price up and that is how bear trap works.
On the other side, In Bull Trap when Resistance level is broken then Break out traders buy at Breakout and then Bears Stop Loss is mostly taken out then Many Bulls are trapped. Therefore, Price takes a dump on failure of a breakout.
Why they do it?
Answer is pretty simple for this: To make more money and get better order filling price for their big order trade.
Whales/Instituions do get have a big order size and especially when they have insider news or information before it becomes available to public. They always seek to get their big order size filling in Blocks at better Price.
For that reason, they do overwhelm a Support level with Supply to take out Retailers out of that trade and fill their big order size in Blocks. Sometimes, when Market Makers see good Opportunity to take out Retailers out of trade they do same as well by Breaking Key Level on Either side.
How to avoid it?
This can be done in 2 ways, by having either your Stop Loss wide enough or look out for a key level is so obvious to everyone and thus expect Stop Loss Hunting at that level.
What I do sometimes is that when a key Level is broken and it is coming back to support then you can trade from that level where an obvious key level is broken and most Retailers are taken out of the trade.
For example:
You can clearly see how an obvious level of 30K majority was watching and it was taken out and many retailers would def had been liquidated or their SL must had been taken out.
Diagram in the chart is an example only and is not meant to taken for any financial advice.
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DISCLAIMER: The article is not calling for investment. Every decision is yours to decide.