How to spot and avoid Stop Loss hunting: a complete guide

BITSTAMP:BTCUSD   Bitcoin / U.S. Dollar
Stop Loss hunting happens every trading day, and it's not something you would want to let fly under the radar.

We have carefully orchestrated some examples on the graph to give a clear picture of what this phenomenon really is, and listed some tips on how to avoid getting into this mouse trap.

In basic terms, Stop Loss hunting is the strategy of the price action spiking above/below key levels to enter the pool of Stop Loss orders and take the masses out of their positions before moving the price in the destined direction.

Looking at the first example, we can observe that a nice double top pattern has been formed. This is one of the clear indicators that the price might potentially drop after failing to rise above and forming a new top. Thus, a trader would most likely go short and set his Stop Loss a few pips above the freshly formed area of resistance. What happens next is obvious - a trader gets liquidated. Why? because him and tens of thousands of other market participants had set their Stop Losses at a very obvious key level - above the local zone of supply. After successfully spiking up and grabbing some liquidity, the price peacefully continues its bearish movements in the predetermined direction.

The second example is a similar one as well. "What a beautiful ranging market. Let's buy at support and sell at resistance." Only if it was that easy...
What happens next, the price spikes below the lower boundary of the sideways-moving range and grabs liquidity before moving in the upside direction.

Stop Loss hunting scenarios will always happen, and to be honest, we cannot really avoid them all. However, there are some tips that we can follow in order to evade these traps.

Firstly, you should never rush into entering positions. Eventually, the price will come to your levels and develop into some patterns ( Double Top , Head&Shoulders etc.) before starting its big moves.

With that being said, no FOMO either. There will always be fish in the sea, just like there will always be opportunities in the market. Be patient, cold-blooded, and wait for your time.

Do not set a tight Stop Loss, because you will most likely get taken out immediately. Either set a wide one so you can escape hunting in case the price starts spiking up and down, or wait for cases of a fake breakout a.k.a liquidation before entering a position.

Last tip is a pretty smart one: set your entry orders at levels where masses would put obvious Stop Loss orders. Then, you will notice how many times the price goes in that direction.

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