Stop hunting

Stop hunting

The stop hunting fenomenon

The hunting of stop orders represents a strategy that aims to trick market participants into getting out of a trading position. This is possible because the orders of the vast majority of those participants are placed at price levels that are easy to foresee.

Where does stop hunting usually happen

• near levels of support or resistance;

• around certain most used parameters for indicators such as moving averages;

• near the closing price or the opening price for a certain time period;

• near the highest or the lowest price for a stock or a currency pair for a certain time period.

  Ways of execution

  Stop hunting is a method for searching liquidity. When institutional market participants are in need of liquidity they force the price of a financial instrument in their desired direction. Having the necessary resources and buying power they can afford the short term losses of these actions in order to take advantage of their longer term positive effects. When the book of orders shows a cluster of orders at a certain price their aim is to reach those orders and trigger them. This way the weak market participants are forced to get out of a position which otherwise would have turned out profitable or they are forced into a new position with the logic behind opening that position being present only at that moment.

  Spring or the beginning of a new trend

  Often the stop hunting is a sign of an accumulation or a distribution period coming to an end. On the other hand this marks the beginning of a new trend. According to the Richard Wyckoff theory the last hunting of stops represents the final exchange of positions between the weak and the strong market participants – the so called “spring”. This leaves the weak players out of the price movement that follows from which only strong hands get to profit. After some time and some movement in the price this sequence of events is repeated again in the opposite direction which leads to the completion of a cycle.