Stop-loss hunting definition
Stop-loss hunting
Stop-loss hunting refers to when a market seems to be reaching for a certain level that is believed to be heavy with stops. If stops are triggered, then the price will often jump through the level as a flood of stop-loss orders are triggered.
The extreme volatility experienced when so many stop orders are triggered can prevent useful trading opportunities for many traders including the opportunity to make a quick profit by the large price move or open a discounted position in the expectation that the price will soon rebound to the previous levels.
Stop-loss hunting example
For example, the USD/JPY is trading at 91.50. It’s possible that traders will place stop-loss orders below 90 so they can still benefit from upward movements while safeguarding themselves from loss. If USD/JPY falls below 90, many stop-loss orders will be triggered. Some traders may seek to see this triggered so they can profit from the volatility. They could either open short positions and make a quick profit from the jump in price as the stop-loss orders are triggered below 90, or they could open long positions after the mass stop-loss trigger to profit from the rebound.