Unmasking Stop Hunting: Insights into the Techniques Employed by Market Whales

Imagine you have taken the time to analyze the market thoroughly to enter a trade. A while later, the price quickly moves towards your stop loss, hits it, and then runs to your target without you. This scenario is called stop hunting. While it is a controversial topic, it happens on a daily basis and is one of the main reasons many traders are not profitable.

Stop hunting is one of the most common practices in the financial markets. It happens when the price triggers a pool of stop losses located at a certain price level and then reverses rapidly. Market whales are usually behind this manipulation, inflicting heavy losses on the retail traders while profiting themselves. So, many believe that stop-hunts badly hurt market integrity.

In this article, we shed light on the mechanics of stop-hunting. We analyze the reasons behind this phenomenon, when it happens, and how to protect yourself against it. Moreover, we introduce the manipulators hunting your stop losses and explain their potential motives. Finally, we discuss the impacts of stop-hunting on copy-trading platforms and how Finestel has handled it.

What Is Stop Hunting?

Stop hunting is an unorthodox trading strategy used by certain powerful market participants. It involves intentionally moving the price towards areas with a high density of stop losses. Stop losses are orders which are designed to protect traders from huge losses. When the price triggers a stop loss, the position automatically closes almost instantly.

Certain price levels stop losses tend to concentrate, called liquidity pools. When the price moves towards these liquidity pools, a liquidation cascade occurs where a large number of stop losses are activated, this event leads to significant buying or selling pressure which usually results in rapid fluctuations in price.

The Correlation of Stop Hunting and Stop-Loss Orders

Stop-losses are certain risk management tools designed to protect traders against substantial losses. When the price reaches a stop-loss, the exchange or broker automatically closes the position. Stop-losses are buy or sell orders themselves and can create pressure on either side that results in increased market volatility.

Stop hunts often occur where stop losses are concentrated. Market manipulators usually look for these potential areas and direct the price toward them. By triggering the stop losses, they cause heightened volatility and spikes in volume, which they exploit to reach their own goals. Therefore, areas with a high density of stop-losses, AKA liquidity pools, tend to attract the price and are prerequisites to stop-hunts.

When Does Stop-loss Hunting Happen?

Stop hunting can occur at any time and under any circumstances. Yet, certain market conditions usually lead to stop hunts. Here are some examples:

• High-impact news releases: These can occur during significant news releases. The subsequent psychological reactions of traders provide an opportunity for the manipulators to hunt their stop-losses.
• Thin markets: Thinly traded or illiquid markets have low trading volumes and are ideal for the whales to manipulate because making significant price swings is much easier and requires less capital.
• Highly leveraged markets: When a large number of traders use high leverage to trade the markets, especially a thin one, it attracts whales to conduct stop-hunting. The reason is that triggering leveraged positions’ stop losses can cause liquidation cascades, leading to massive price movements.
• Certain technical and psychological price levels: Last but not least, there are certain price levels that the majority of market participants value either technically or psychologically. Stop-loss orders tend to concentrate on these levels, making them an appealing target for manipulation.

Who Hunts Stop-Losses in Crypto?

Now that stop-loss hunting is introduced, questions arise surrounding the identity of stop-hunters. In the crypto market, various entities such as financial institutions, whales, or even certain exchanges engage in stop-hunting. The main similarity between the aforementioned players is their access to substantial resources. Their large amount of capital allows them to manipulate the price, pushing it towards stop-losses and triggering them to profit themselves.

Financial institutions, such as hedge funds active in the crypto market, are one of the groups that engage in stop-hunting practices. They target liquidity pools, and by triggering the stop losses residing there, they create significant price swings and ride them to gain profits.

The second group of manipulators are market whales. Whales are often individuals who hold large amounts of cryptocurrencies. They utilize their financial resources to hunt other traders’ stop-losses and manipulate the market in their own interest. Whales are usually the main market manipulators in the crypto market, as they have a huge influence on the price and even social media and market news.

Lastly, there have been cases in the past where certain exchanges have been accused of stop-hunting. In addition to access to large funds, exchanges also have the platform to execute the trades in ways to move the price toward liquidity pools and hunt their own users. Note that the majority of crypto exchanges avoid this practice as there are severe legal consequences for market manipulation. Yet, some still might practice it behind the scenes.

Why Do Whales Hunt Stop-Losses?

There are a few different reasons why whales engage in stop hunting, especially in the crypto market. Mainly, whales have no other choice than hunting stop losses to accumulate or offload their positions at ideal prices because a large chunk of their huge orders would not be executed at favourable prices as the market would move away as a result of their significant supply or demand. Therefore, they need to force other traders by hunting their stop-losses to buy or sell at certain levels to hold the other side of their deals.

Firstly, whales usually possess different trading strategies, and creating significant price movements can be beneficial for their strategies. They can also create fear and greed by initiating massive movements by hunting stops. The resulting mistakes in judgment would make retail traders buy at higher prices or sell at lower prices to them. Moreover, whales can also induce more traders to buy or sell when rapid price movements occur due to liquidation cascades. These false breakout signals would also provide more liquidity for the whales to execute their orders conveniently.

How Do I Know I’m Being Stop Hunted?

There are several signs which can assist you in detecting stop hunts. Here are some of the clues suggesting you are at risk of getting targeted:

1. Significant Spikes in Volume: A sudden surge in volume indicates that whales and other big players have entered the market. They are potentially intending to make rapid price movements and trigger other traders’ stop-losses.
2. Repeating of Stop Runs: This scenario generally occurs when the market is consolidating in a range. The price continuously runs towards the highs and lows of the range, hunting the liquidity residing above and below them and reversing to the other side.
3. High Spread or Slippage: Unusually high spread (difference between the bid and ask prices) and slippage (difference between expected and actual execution prices) are two of the common signs that market manipulation and stop hunts are happening.
4. High Volatility: The most common occurrence during these events is massive price fluctuations. These aggressive price movements mostly target stop-losses or are themselves a by-product of liquidation cascades.

Example of a stop-hunting scenario

It would be insightful to provide a clear illustration to understand better how it occurs:

Take an imaginary cryptocurrency, ABC coin, which is highly popular at the moment and is currently trading at $11. A huge number of traders are currently holding long positions on ABC. Judging by social media sentiment and technical analysis, the $10 level is a key support zone for the price, and a break below it would likely lead to a bearish reversal. So, the majority of traders have placed their stop losses just below the $10 mark, creating an attractive liquidity pool.

Relying on their own analysis and market sentiment evaluation, whales are likely aware of the concentration of these stop-loss orders below the $10 level. They might also be responsible for creating the social media wave among traders that convinced them to put their stop orders below the aforementioned level. The whales would then proceed to hunt the stop-losses.

The stop-hunting event can be quite easily observed on the chart. The price aggressively drops below $10, triggering all the stop-losses. Then, the price would rapidly recover above the mentioned level and begin a rally higher. This movement can be seen by a large candlestick with a huge shadow to the downside. Also, the traded volume during this event would also be significantly high.

Tips on How to Avoid Stop-Hunting

There is a high probability that you eventually experience stop-loss hunts as a trader. Meanwhile, there are some tips to lower the likelihood:

• Use Different Exchanges: In case you have access to large funds, and you want to take a certain position, try to divide the volume between multiple exchanges. This would reduce the chance for the exchanges to find your stop loss attractive (if we assume some exchanges engage in this activity), as your positions are now smaller and might not be worth the risk for them.
• Place Stop-Losses Conservatively: Most traders set their stop losses right next to support or resistance levels, allowing no room for movement beyond them. By placing stop losses at a pre-determined distance from significant levels, you reduce the chance of getting hunted. Note that determining the sufficient distance would depend on market volatility.
• Actively Monitor the Market: By actively observing and analyzing market movements, you might be able to anticipate stop-hunts. You can then reduce your risk exposure or completely exit the market before getting hunted.
• Learn Advanced Technical Analysis: Most basic technical analysis strategies instruct traders to place their stops at certain support resistance levels like double tops or bottoms. Yet, by educating and learning advanced analysis, you might be able to avoid it by setting your stop orders at different areas or even entering the market after these occur.

The Dark Art of Hunting Stop-Loss Orders: How to Hunt?

To provide a step-by-step guide for stop-hunting by the whales, let us return to our example about ABC coin:

1. The whale should initially target a popular coin like ABC, which is highly liquid and provides opportunities for manipulation. Analyzing daily volume and social media platforms can assist in finding hot tokens.
2. Next, the Whale should conduct advanced technical, order book, and sentiment analysis to determine high probability liquidity pools. Furthermore, there are also some conspiracies regarding how some exchanges might sell information on where the stop-loss orders of their users are located to the whales. While this is an unethical and illegal practice, as stop market orders are not shown on the order book and are a secret between users and their exchange, it would help the whale exactly determine stop-losses levels.
3. Then the whale must then sell a specific amount of ABC coins at the market to push the price lower. If the whale does not hold ABC, they can use leveraged futures short orders.
4. As the price drops below $10 and initiates a liquidation cascade by triggering stop losses, the whale should accumulate the coins being sold at prices lower than $10 and can buy using market orders or previously set buy-limit orders.
5. After the supply shrinks, the whale should now push the price higher using market-buy orders to initiate a new bullish phase. Other traders and investors would not try to hop on at higher prices to profit from the rally.
6. Now is the time for the whale to sell the accumulated coins at higher prices to eager but late buyers. So, the whale can now profit by buying cheap coins from retailers and selling expensive ones back to them.

How Finestel’s Copy Trading Platform Averts Stop-Hunting of Users

Most copy trading platforms can involuntarily cause their users to get stop-hunted. These platforms allow numerous investors to copy the executions of a limited number of traders and automatically place their stop-losses where the traders deem suitable. This would lead to stop-losses piling up at certain price levels, making them an attractive target for market manipulators.

Then there is Finestel, a leading asset management solution provider with cutting-edge copy trading technology. Finestel has handled this problem in a smart way. When traders set their stop loss orders, Finestel stores their order information internally and does not send them to exchanges, so they are not aware of where the stop losses are.

However, when the stop loss gets triggered on the trader’s account, Finestel instantly closes the position with a market order on the investor’s accounts. Therefore, our advanced technology and lightning-fast copy trading service enable us to protect our users against manipulation and stop-hunts.

Stop-Hunting Unveiled: A Closer Look in an Infographic

Conclusion

Stop-hunting is a controversial issue in the financial markets. However, it is an inevitable event and can lead to catastrophic consequences for traders. In this article, we introduced this concept as a practice carried out mostly by whales and maybe some crypto exchanges. We demonstrated their potential motives and tips on how to detect and avoid them. We then demonstrated the dark art of stop-hunting step by step and in detail. Finally, we explained the potential stop-hunting problem for copy trading platforms and how Finestel has solved this issue, protecting its users from market manipulators.

Yet, while this article has provided valuable insights on the this subject, traders still need to educate themselves about financial markets and how they work. By studying the markets carefully, traders will raise their awareness and empower themselves to protect their capital against massive losses caused by stop-hunting.

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