Stop loss hunting: Whale manipulation strategies #2 - How to not get caught short!

in cryptocurrencies •  2 years ago  (edited)


Hi all, Id like to introduce you today to a second whale manipulation technique used to crash various financial instruments through strong levels of support, stopping out the weaker or more tightly managed hands, giving the whales the opportunity to further increase their position size at a considerably lower price.

Stop-loss hunting is the act of intentionally pushing the price down through a major support level to trigger stop-loss orders, creating a flash-crash which can then be used to buy coins on the cheap.
It is incredibly easy to do with anything that has low volume at any point during the day, which is a vast majority of cryptos outside the top 15.

Let's say you're a whale with a large amount of BTC and you have reason to believe there's some awesome news coming out for coin ABC which will generate a nice pump, so you have been accumulating this coin over the past week and are sitting on about 50BTC worth. The volume on the coin is currently very low and so you can't purchase any without driving up the price, which you don't want to do.

The setup:
First you look at the price, order book, and volume, and note the following:

It's currently trading at 105K satoshi.
The order book is very thin - there's only about 6 BTC worth of buy orders between 105K and 100K
There's only another 2BTC of buy orders just below 100K.
anything below 95K you don't care about.
You know that 100K is a major psychological level and there are bound to be stop-loss orders below it.
Time to go hunting and pick up some more coins for cheap!
You place several market sell orders totaling 5 BTC, driving the price down to 101K.
You then place some massive sell walls of 4-5BTC at 101.5BTC, hoping to trigger panic.
If panic doesn't follow, you make a few more market sells and the price collapses down to 100K.
A few more sells and you push the price to 99K.
Now the fun begins. You have sold off about 10BTC of your 50BTC position, now sitting on 40BTC.
Plenty of retail investors had their stop-losses placed at 99.5K, and their orders are triggered. They begin placing limit sell orders (without even knowing) and driving the price down further.
The price has now collapsed to 96K, almost a 10% drop, in just a few minutes.
There are now 30BTC of stop-loss orders for sale between 96K and 105K, and you buy them all.
Price returns to the previous 105K and you now own 70BTC worth of coin ABC.
In short, by selling 10BTC of your position for an average of 101K you created a short-lived 10% price collapse which you then took advantage of to buy up a bunch of cheap coins from stop-loss orders for an average of 99K. Not only do you now own 20BTC more of your coin, but you got them at a discount. Awesome for you, sucks for the poor holders who you hunted and now no longer have their coins.

What does stop-loss hunting look like on a graph? As you might expect, it looks like a massive spike down followed by significant bull action and a return to norm. Often whales do stop-loss hunting right before pumping it themselves, so you may even see stop-loss hunting followed by a huge run up.

Avoiding being Hunted
How do you prevent getting "hunted"? There are really two ways.

Use price alerts instead of stop-losses.
By the time you get the alert and check the price, the hunt will probably be over. The downsides to this are that it requires a strong ability to remain unemotional - something most people don't have (and why people use stops in the first place). You still have to honor your mental stop-losses, you just also allow them a bit of time to ensure that the move was authentic. In trading circles you'll here this referred to as "letting the candle complete."

Place smarter stop-losses.
As you can see from the previous graph, price fluctuations and volatility in this market is significant. The best way to do this is to look at the average order book size, calculate volume and how many sells it would take to crash the price a given amount, and ensure your stop-loss is below that. You should also place stop-losses away from major psychological levels, such as 100K satoshi or even 99K. Place them either higher (106K) or lower (94K) depending on the market.

I personally roll with option 1 (assuming I even have coins on an exchange, which is rare), but there's nothing wrong with either choice.

I hope this has helped at least one or two people understand what stop-loss hunting is, why it's important, and how to avoid being "hunted" and having your coins stolen from you.

I also have suspicions that binance has bots that chase stop-loss orders.
As an experiment I placed a stop about 5% below the current price on a coin and with only about 1BTC of buy orders between my stop and the price. Within 5 minutes my coins had been stopped out and the price had returned to its previous level.

If volume is low enough, a whale can push the price down through a major support and trigger your stop loss orders and then take your coins from you.

Other references - note, none are about crypto so some assumptions they make do not apply such as stop-hunting not being a thing in forex (it's definitely a thing in crypto).

Investopedia - Stop Hunting Definition
Investopedia - Stop Hunting With the Big Forex Players
Where to set your stop losses to avoid being hunted

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Good article. That was well laid out and informative. Especially for day traders and more short term traders.
Based on our comments in some prior article there's also the option of value investing, which to a great extent obviates the need for all those stop losses in the first place. Maybe third option. In that situation you'd have seen if you need to sell or buy and at what level long before any potential triggers.

Thanks very much :) Well my self personally am a longer term swing trader so my SL's are usually much more conservative and the daily signals i post - at least for me - are continuation signals and thus trade management signals.

Dont get me wrong, they are entry signals by any right and the levels shown are key levels for SL's and TP's , but id strongly advise anyone that catches any of my signals, especially the newer traders to not take profit at the target but rather let the market move. That gives you room to begin putting the Pyramid trade management technique in place and lock in free trades and that in itself will eliminate any emotion you have about the trade.

Hi! I am a robot. I just upvoted you! I found similar content that readers might be interested in:

I wish I had that kind of stack to play this game. It’s honesty genius, but do hurt little guys like us.

You and I both! But at the same time I'm very for the people. It may be warped of me to think id be any different if i was playing with that sort of money. I've known these techniques for a long time and just the knowledge of them will save you a lot of money loss if you can keep yourself emotionally stable. As always that's 95% of the battle!

any chance you are reddit user caffineismyheroine?