Stop hunting is a technique used by some traders to force people to abandon market positions they are holding, with the goal of increasing volatility and setting up the potential for lucrative trades. In stop hunting, people aim to push the prices of securities 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 they tend to cluster around whole numbers, as traders often pick whole numbers for easy reference. A stop hunter will use this trend to advantage.
When traders place stop orders, they indicate that when the price of a security falls below a certain point, their shares should be sold. This allows people to get out of a losing position and people often pick a whole number like 50.00 for convenience when placing such orders. Stop hunting involves using trading to push security prices down, hoping to hit the point where clusters of traders have placed stop orders. When that point is reached, those orders will become active and a flood of securities will be released onto the market as people attempt to get out of their losing positions.
Stop hunting generates substantial volatility by increasing the volume of trading and it can set off a panic as investors attempt to adjust to the sudden change in the market. Experienced traders can use volatility to their advantage whether prices are trending up or down and may use stop hunting to create favorable positions for themselves. Even people holding long positions may be pushed into selling by market volatility if they are concerned about losses and traders can take advantage of this.
People using the stop hunting technique rely on other traders, brokers, and players in the market to respond as prices shift. This technique can be of advantage to many different kinds of people and while people cannot collude to influence the market, people may participate separately in their own stop hunting attempts, forcing prices down to see what gets flushed out.
In some trading communities, there are fears about brokers using their knowledge of stop orders to go stop hunting for personal profit. This practice is not ethical, as brokers are required to look out for the interests of their clients, not to generate profits for themselves. It is advisable to work with a recommended broker known for being ethical and people should always ask their brokers for proof of licensing and certification to confirm that the broker is operating legally.
