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Understanding of Stop Hunting in forex trading
Source: | Author:finance-102 | Date2023-02-17 | 263 Views | Share:
Stop hunting is a strategy used by some traders to intentionally trigger the stop-loss orders of other traders. The idea behind stop hunting is that many traders will place their stop-loss orders at the same price level, creating a cluster of orders that can be triggered by a sudden move in the market. Traders who engage in stop hunting believe that if they can trigger these stop-loss orders, they can create a rapid market movement that they can profit from.

Stop hunting is a strategy used by some traders to intentionally trigger the stop-loss orders of other traders. The idea behind stop hunting is that many traders will place their stop-loss orders at the same price level, creating a cluster of orders that can be triggered by a sudden move in the market. Traders who engage in stop hunting believe that if they can trigger these stop-loss orders, they can create a rapid market movement that they can profit from.


For example, let's say that a large number of traders have placed their stop-loss orders for a currency pair at 1.2000. A stop-hunting trader might intentionally sell a large volume of that currency pair, causing the price to drop to 1.1995. This drop could trigger the stop-loss orders of the other traders, which would cause them to sell the currency pair and further drive down the price. The stop-hunting trader could then buy the currency pair at a lower price and profit when the market eventually stabilizes.


That being said, some traders may engage in stop hunting because they believe it allows them to profit from the market. The advantages that stop hunting may offer include:


  • Profit potential: Stop hunting can potentially generate large profits for traders who are able to trigger stop-loss orders and cause a rapid market movement. If the market continues to move in the intended direction after the stop-loss orders are triggered, the stop-hunting trader can profit from the downward or upward trend.


  • Market control: By triggering stop-loss orders, stop-hunting traders can influence the direction of the market and create a price movement that benefits them. This can give the impression that the market is moving in a certain direction, which may cause other traders to follow suit and amplify the movement.


However, it's important to note that these advantages are not necessarily beneficial to the market as a whole. Stop hunting can be harmful to other traders who may have their stop-loss orders triggered against their will, potentially causing them significant losses. It can also erode trust in the forex market and create a perception that the market is rigged or unfair. Ultimately, the disadvantages of stop hunting are likely to outweigh any perceived advantages.


It's also need note that stop hunting is a controversial practice and is often viewed as unethical. The reason for this is that stop hunting can cause losses for other traders in the market who did not intend to exit their positions. These traders may feel that they have been unfairly targeted by the stop-hunting trader, who is using their stop-loss orders to create a profit.


Forex brokers and regulatory bodies have implemented measures to prevent or discourage stop hunting. For example, some brokers offer "no dealing desk" trading, which means that orders are automatically routed to liquidity providers rather than being executed by the broker's dealing desk. This can help to prevent the broker from engaging in stop hunting. Additionally, regulatory bodies may impose fines or penalties on traders who engage in abusive trading practices, including stop hunting.