Brought to you by the Liquid team to help you make sense of crypto.
What is stop hunting?
You may have seen traders talking about a "stop hunt" in relation to a particularly chaotic period of price action.
Stop hunting is a trading strategy that involves triggering the stop loss orders of other traders in the market to trigger a temporary high-volatility trading environment.
Stop hunting works on the basis that many traders tend to gravitate towards certain price levels to set stop losses.
In traditional forex markets, it’s common for novice traders to set stop loss orders at round numbers or other levels that “make sense”.
The same applies to cryptocurrency.
Who stop hunts and how do they do it?
Before you get any ideas, stop hunting is not something your typical trader can trigger.
Stop hunting is typically initiated by larger players (whales) who have the necessary capital to push a price in a certain direction to trigger stop loss orders.
How do they do it? They buy or sell a large amount of the asset in question – and they do it very quickly.
After a block of stop loss orders are hit, they are then executed as market orders which effectively moves the price of the asset further in the desired direction and causes high volatility for a shirt time.
Stop hunting is especially powerful in leveraged markets where participants are able to trade with loaned capital.
It’s common for leveraged traders to get liquidated during a stop hunt.
In the BTC/USD 15-minute chart above, there is an established resistance level in the 3,345-3,350 USD range highlighted in green.
With this in mind, it wouldn’t be surprising to expect a large block of stop loss orders around USD3,355 set by traders who opened short positions.
At the end of the highlighted area, there is a large upper wick as large market participants inject just enough USD into BTC to start triggering a cascade of stop loss orders.
In this case, as stop loss orders on short positions are triggered, traders are forced to buy back at a higher price, which pushes the price up and provides a liquidity pool for “smart money” to open short positions.
Following a stop hunt, the market typically reverses, leaving stop hunted traders at a loss and smart money with a favorable entry price.
How to avoid getting stop hunted
The best way of avoiding a stop hunt is to just avoid stop hunts.
This may sound silly at first, but stop hunts typically occur at known support and resistance levels, so a surefire way of avoiding a stop hunt is to simply not open a position at a support or resistance level before receiving confirmation.
In the case of our example above, the stop hunt was followed by a drop and then a small retrace to the upside.
This retrace would have been a much safer short entry for conservative traders.
Another way to avoid getting caught in a stop hunt is to account for crypto volatility when setting your stop loss orders.
In crypto, a single player can have a huge influence on the market – and this is especially true for low cap altcoins.
It’s important to account for this particular trait of the market by setting proper stop losses. For example, a 1% stop loss might work on BTC, but may be unsuitable for a smaller cap coin.
In conclusion, a stop hunt is a strategy that pushes price in a certain direction to trigger a cascade of stop loss orders.
It’s a used by larger players to push smaller players out of their positions.
In order to reduce the chance of getting stop hunted, you may consider trading more conservatively by waiting for confirmation and using a proper stop loss strategy that works with the asset in question.
This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.
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