Stop Loss Hunting – Are You The Hunter 🤠 Or The Prey 🍖 ?

Hello guys,

In today’s article, I am not going to tell you which type of order to use, because that was the main message of the previous one. Today, I will focus on another interesting phenomenon related to this topic – Stop Loss Hunting.

“My Broker Is Hunting My Stop Loss”
A typical thing beginner traders say: “My broker is hunting my SL, he knows exactly where it is and he always makes the price go exactly there.” Or “I am the most unlucky person ever – the price always hits my SL and then turns the way I predicted.”

Sure, having a reliable broker is crucial but in this case, it’s very often the fault of the beginner trader. Well, in fact this is not just beginners. Even advanced traders have such problems…

Let’s now talk about what is the reason of this “SL hunting” and let’s use a recent example.

Heavy Volume Zones On DAX
A couple of days ago I wrote an analysis on DAX. In this analysis, I showed a strong volume-based swing Support around 14.600.

As a reaction to this I received a couple of emails from people asking me why not the higher area, around 15.250? Both are heavy volume zones, so why not trade both?

Lets talk about the 15.250 zone now.

Those heavy volumes you see there were accumulated in a rotation area around 15.250 (marked in red). That rotation area though, had a very “weak low“.

The Weak Low
There were so many little reactions to the low of the price channel, but not a single big and strong rejection.

What many traders do is that they have their SL orders below the rotation channel. This is usually traders who trade breakout strategies, or traders who are trailing the trend.

The picture below shows this rotation zone more in detail and it shows all those small and weak rejections. Below such rejections, many people place their SL orders.

I call the areas where people place a lot of their SL orders “SL Clusters“. What usually happens is that the price goes there and “consumes”all those SL orders there.

Who is doing this? Not the “evil broker”. It’s the BIG trading institutions who manipulate the price to go there. Then they take all that free liquidity there (liquidity from those SL orders). Big guys need liquidity. They need it to enter their trades. They actively manipulate the price and look for places with liquidity like the one I showed you.

BOOM! – Everybody Out!
A phenomenon worth noticing with such “SL hunting” is that the price usually shoots rapidly through such zones. BOOM! Everybody is out 🙂 Often with slippage.

Why does the price shoot so fast through such areas? Because STOP LOSS order is a MARKET ORDER. This is important!

Stop Loss Order = Market Order
If you read the previous part of this article then you know that a Market Order means that you are able to quit (or enter) your trader NOW. The downside is that you may get a slippage, because NOW there might not be a big enough counter-party (exactly at your desired price level) to Buy what you Sell, or to Sell what you Buy.

Stop Loss Hunting
When there is a SL run, then all those people whose SL get hit enter a Market Order to quit their position. Market Orders are sort of catalyst that move the market. Those are aggressive orders.

This is the reason the price shoots fast past SL Cluster areas. SL clusters are catalysts and people often get slippage when their SL gets hit there.

Now, lets get back to that 15.250 level on DAX.

Stop Loss Hunting On DAX – EXAMPLE
Below this heavy volume area, there was a SL cluster. For this reason it was not a good idea to go Long from 15.250, because the SL cluster was right below it.

As you can see, the institutions recognized this SL cluster and they moved the price towards it. When the price hit this area it was quick. Whoosh! All those SL orders got hit. The fact that SL orders are Market Orders helped the price to shoot past this area fast.

Remember – Market Order means – I want in (or out) NOW!

So, that’s exactly why I don’t like trading Longs when there is such SL cluster below the potential Long entry level – when there is the “weak low“

You guys liked this article? I hope you did! Let me know your thoughts in the comments below.

Have a GREAT weekend and happy trading!

-Dale