Between 65-90% of retail Forex traders will lose their entire trading account, in large part because they don’t know where to place their protective stop losses. Institutional traders are the ones who profit from individual trader losses as there is a predictability in the behaviour of retail traders, and how they trade the Forex market. Institutional traders like banks, hedge funds, investment firms, and dealing desk FX brokers, are notorious for exploiting these behavioural predictabilities and push the price levels through these barriers in an effort to hit the stops and close the trades of retail traders in order to free up liquidity. Stop hunting has a negative connotation among retail traders because they think their individual stop losses are targeted deliberately. In actuality, Institutional traders are only looking for significant clusters of stop-loss orders that are gathered at visible technical levels.
Stop Hunting Strategy
Institutional traders will buy at the levels most retail traders place their stop losses at. As an institutional investor trading larger volumes in a single trade, it’s harder to get an order filled. Occasionally, in order for a large order to get filled, the institutional trader will need to generate the liquidity themselves. And, as retail traders hide their stops at obvious technical levels, this becomes an excellent source of liquidity for the big players to target. Most common technical levels that retail traders use to hide their protective stop losses are:
- Support and resistance
- Previous swing high or swing low
- Big round numbers
- Above/below technical indicators
- Above/below chart patterns
Stop losses will be crowded around these obvious levels, and institutional traders will bid the market at those particular technical levels, so they can get the needed liquidity to fill their big orders at the expense of the retail traders.
How to Profit from Stop Hunters
To be able to profit from stop hunting you must first understand why stop hunting occurs before you can identify when a stop hunt will occur. A stop hunt is more likely to happen when there is a significant build-up of stop-loss orders below, or above, important support and resistance levels. The institutional investors are able to hunt stops because they understand the retail trader mindset. Once the stop orders are hit, provided there is enough liquidity, it will force the price to move lower and start a cascade of triggered stop orders. Institutional traders will be able to take their profits and buy back at a much better price. One of the most common misconceptions retail traders have is that the more obvious a support and resistance level is, the more reliable that level becomes. As this is not true, and it is known how retail traders think, this information to a trader’s advantage.
Instead of going long at a clear support level, which has already been tested several times, you might want to go short and trade like institutional traders targeting the stop orders below the obvious support level.
Forex Stop Hunting Strategy
A good Forex stop hunting strategy requires two things:
- Identifying clear technical levels that retail traders might use to hide their stop loss.
- Entering a position that seeks to target those stop loss orders.
Conclusion
The market exchange rate will reach obvious stops most of the time, so don’t use the obvious levels to hide your stop, and instead put your entries where the retail traders put their stop losses.
