How to Avoid #StopHunts in #ForexTrading? (2020)
Picture this: You have used your trading strategy to find a setup in the Forex market. You have set your stop loss and take profit level. You place your trade and go out for a walk. Hours later when you check on your trade, you see that your stop loss was hit. You head to the charts and notice that the market suddenly went out of its way to hit your stop loss, before going in directional you thought it would go.
New traders ask what gives?
This unfortunate event is called a stop hunt. A stop hunt is when institutions drive price for a Forex pair to a certain level (where most people keep a stop loss), in order to get a favorable price, before reverting price in the opposite direction.
I will give you an example: Let’s say the RP Hedge Fund wants to buy 1,000,000 million Euros because they believe the Euro will get stronger in the next month and go to 1.26000. The current price of EURUSD or the Euro vs. the Dollar is 1.25700. RP Hedge Fund knows that millions of retail traders have a stop loss at 1.25500. Therefore, RP Hedge Fund will push EURUSD to 1.22500 activating everyone’s stop loss. Retail traders will then enter short on EURUSD, which will help push the price even lower. Now EURUSD is at 1.22000. RP Hedge Fund will now buy 1,000,000 million Euros and make a profit of 1,000,000 X (1.26000 – 1.25000) = 10,000. Instead of making 1,000,000 (1.26000 – 1.25500) = 5,000.
Now that we know what stop hunting is and why it occurs, we need to learn how to avoid them.
It will be a tall order to avoid every single stop hunt, but you can minimize the number of times it occurs.
To do this you need to follow these two guidelines:
1) Do not put your stop loss at support and resistance levels, or common/psychological levels.
2) Do not put your stop loss at any random level, make sure it is devised from your strategy.
We will now take a look at an example to better your understanding.
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