Forex Trading Education - How Stop-loss Hunting Occurs

By: Harold Hsu

Stop-loss hunting is essentially the act of a powerful (i.e. wealthy) financial institution that temporarily causes the market price to hit your stop-loss order and causing you to exit the market at a loss. In this short article, I will discuss the typical market conditions that encourage stop-loss hunting, and how to avoid it.

How Does It Happen?

For stop-loss hunting to occur, the financial institutions will need to buy (or sell) a large volume of currency before prices can move in the direction that the institutional traders want them to.

Thus, the institutional traders will typically prefer to hunt for stop-losses when the trading volume is low, such as the time just before an important economic news announcement.

Here's what happens:

1.The institutional traders wait for prices to hit a resistance level (for example)
2.They enter orders to purchase a large volume of currency
3.Because the trading volume is low, the large buying order will cause market prices to shoot up past the resistance level
4.All the poor traders who placed their stop-losses a few pips above the resistance level will get stopped out
5.Because their stops (buy stop orders) are hit, the price will continue to go up even higher, hitting more of other traders' stop-losses!
6.Next, the institutional traders sell the currency because everyone else will be looking to sell, and prices are likely to go back down again since all the buyers have already been 'exhausted'

How To Avoid Stop-Loss Hunting

Unfortunately, there is no sure way of stopping this from happening. The only thing you can do is to avoid trading during the off-peak trading times, or times before an economic announcement. These are all times of low liquidity and it's easier for the financial institutions to influence market prices then.

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