Stop-loss Hunting And How You Can Identify It
What Is the Definition of Stop Hunting? Stop hunting is a method for forcing some market players out of positions by raising the price of an asset to a level where numerous others have placed stop-loss orders. The simultaneous activation of several stop losses causes extreme volatility, which can give a unique opportunity for investors looking to trade in this situation. Before we give you an explainer on stop-loss hunting, it is important to know that you need to analyse them for maximum profits. At Zebu, one of the fastest-growing brokerage firms in the country, we have created the best Indian trading platform with the lowest brokerage for intraday trading. If you would like to simplify your option trading game, we are here to help you out. Stop hunting is motivated by the fact that when a large number of stop losses are triggered, the price of an asset might change dramatically. Traders benefit from price volatility because it gives prospective trading opportunities. Assume that ABC Company's stock is currently trading at INR 100 and appears to be moving lower. Many traders may set their stop losses just below Rs 100, at Rs 99, so that they may still hold on to their stocks and profit from an upward move while reducing their losses. Traders foresee a rush of sell orders if the price falls below Rs 100, as many stop losses will be activated. This will push the price lower, allowing some traders to profit from the drop and possibly even open a bullish position on the expected recovery to the previous range. Stop-Loss and Stop-Hunting Orders Stop-loss orders are slightly more difficult than a standard market or limit order. An investor will put a stop-loss order with their broker to sell a security when it hits a specific price. If you own shares of XYZ Inc., which are presently trading at Rs 1500, and you want to protect yourself against a substantial drop, one option is to place a stop-loss order to sell your XYZ holdings at Rs 1475. Your stop-loss order is triggered and changes into a market order if XYZ falls below Rs 1475. Your XYZ positions would be liquidated at the best price available. Stop-loss orders are used to limit the amount of money that an investor can lose on a long position. A stop-loss order can also be used to safeguard a short position. Stop-loss hunting Stop hunting is a simple process. Any asset with a large enough market cap will trade in a more or less defined trading zone with support and resistance points. Stop losses on the downside tend to be crowded in a narrow band just below resistance, while stop losses on the upside tend to be clustered just above support. Due to their market influence, larger traders looking to add to or exit a position might change the price action with volume trades that amount to stop hunting. Increased volume with a clear directional push will usually signal this on the charts. For example, before breaking through, the price action can bounce twice off support on growing volume. Smaller traders take advantage of this stop hunting tendency to profit from the short-term volatility it generates. You can participate in stop hunting on the downside with a short position or consider it an opportunity to begin a long position at a price lower than the current trading range, depending on your method and indicators. As we mentioned before, stop-loss hunting needs the best Indian trading platform and the lowest brokerage for intraday trading. As one of the best brokerage firms in the country, we have created a powerful trading platform that makes option analysis easy for you. To know more about its features, please get in touch with us now.