Stop hunting is a trading technique used to force people out of market positions, triggering stop-loss orders and increasing volatility. Traders use whole numbers for convenience when placing stop orders, and experienced traders can use volatility to their advantage. Brokers using knowledge of stop orders for personal gain is unethical.
Stop hunting is a technique used by some traders to force people out of the market positions they hold, with the goal of increasing volatility and establishing the potential for lucrative trades. By stopping the hunt, people aim to push stock prices to the point where stop-loss orders will be triggered. Such orders are designed to allow people to hold positions without risking too many losses and tend to cluster around whole numbers, as traders often choose whole numbers for ease of reference. A stop hunter will use this tendency to his advantage.
When traders place stop orders, they indicate that when the price of a security falls below a certain point, its shares must be sold. This allows people to get out of a losing position and people often choose a whole number like 50.00 for convenience when placing such orders. Stop hunting involves using trading to drive down security prices, hoping to get to the point where trading groups have placed stop orders. When that point is reached, those orders will be triggered and a flood of stocks will be thrown into the market as people try to get out of their losing positions.
Stop searching creates substantial volatility as trading volume increases and can trigger panic as investors try to adjust to the sudden change in the market. Experienced traders can use volatility to their advantage whether prices are rising or falling, and can use trailing stops to create favorable positions for themselves. Even people who are long can be forced to sell by market volatility if they are worried about losses and traders can take advantage of this.
People who use the stop-hunting technique rely on other traders, brokers, and players in the market to respond as prices change. This technique can be advantageous to many different types of people, and while individuals cannot collude to influence the market, individuals can separately engage in their own attempts to stop the hunt, forcing prices down to see what is removed
In some trading communities, there is a fear that brokers will use their knowledge of stop orders to stop seeking personal gain. This practice is unethical, as brokers are meant to look out for their clients’ interests, not make a profit for themselves. It is advisable to work with a recommended broker that is known to be ethical and people should always ask their broker for proof of license and certification to confirm that the broker is operating legally.
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