One of the most common frustrations that losing traders face in the markets is getting stopped out of a good trade.
Imagine performing your analysis and then executing a trade. Only for the market to spike against you, pinging your stop loss and then blasting back into your take profit without you.
Your analysis is correct but you’re stuck on the sidelines with a loss in the account.
How would this make you feel?
Frustrated? Upset? Like the market is out to get you?
These are some of the emotions losing traders experience in the markets.
What they don’t realize is that in most cases their stop was placed at the worst possible level – making them an easy target for a stop raid.
Why Do Stop Raids Happen?
Before you can learn how to avoid them, you’ve gotta understand why they happen.
If you are not yet familiar with how market makers operate, I highly encourage you to read this article on manipulation for some perspective.
To break it down in Lehmans terms, it is simply a matter of liquidity.
Institutional traders trade huge size that can move markets. To this regard, they require a cluster of liquidity in order to accumulate or dump a position without tipping the market off with their intentions.
Enter the retail traders! These are the losing traders that provide the liquidity for the institutional trader to execute their positions.
When you see a failed breakout of a key resistance high or support low, there is a good chance the smart money is taking the other side of the position. Check out the chart below for an example of a stop raid which led to a trend reversal.
What you’ll notice around the swing high level at $0.92300 is that there are several wicks to the top of the candles.
At one point during their formation, these candles would have looked bullish on a breakout above the resistance. This type of scenario typically attracts breakout traders and newbies that chase the market in fear of missing out. Meanwhile, the smart money is selling into this retail buying frenzy.
What happens next? The market turns and the retail positions are now in heat. These traders must sell their long positions to get out of the trade, which will fuel further downside in the market and drive profits for the institution.
This is a great example of how the institutions use retail liquidity to accumulate their positions! Now that you know why stop hunts happen, let’s look at some tips on how to prevent you from being part of the losing crowd.
No matter what tips we provide understand that there is no way to avoid stop hunts completely.
That’s like trying to avoid taking losses entirely.
Not going to happen!
The market does what it wants and all you can do is participate and manage your risk.
While we can’t entirely avoid stop hunts, the good news is that the tips below can help reduce the likelihood of you getting stopped out too early!
Tip #1: Use Limit Orders
This one is more geared towards the daytraders, however, this still applies to swing traders as well!
Keeping emotions in check is one of the greatest challenges a trader faces.
Many losing traders are unable to do this and as a result, they aggressively chase the market with market orders, placing their stops at arbitrary levels for the sake of risk management.
The market moves from one area of liquidity to next and if your stop is sitting randomly in between – it will get taken!
By utilizing limit orders instead of market orders, this will force you to qualify trades more carefully instead of letting your emotions pull the trigger for you. Stay calm, locate your level and wait for the market to come to you!
Tip #2: Place Your Entry Limit Where You Would Initially Place Your Stop Loss
If you find that you often get the direction right in your trading but your stops get hit before the real move, you may be closer to turning the corner than you might think!
Take a look at your most recent trades that fit this bill.
What do you notice? Most likely that you would have been profitable if you had given the trade a bit more room to breath.
But what if you don’t want to reduce your position size in order to accommodate a wider stop?
Practice placing your entry limits where you would originally place your stop loss order. If you keep getting stopped out too early, this may just be the fix you need to turn your trading around.
Check out the clip below as our Head Trader, George, breaks down these two tips in more detail:
Tip #3: Wait for Trapped Traders
Standard technical analysis teaches retail traders to place their stops around pivot areas, swings points and around support/resistance within a range.
If you look at your charts, regardless of timeframe, you will often see price enter a zone beyond these traditional stop levels and suddenly reverse.
This is no coincidence, especially now that you are familiar with the reason behind stop hunts!
Being on the right side of these moves will often drive your positions into profit quite rapidly.
The key here is being able to spot where the majority may be on the wrong side of the market. Then positioning yourself to take advantage.
Take note of the chart above!
We have highlighted two stop raids which both signaled trapped long traders that were ready to puke their positions.
This type of price action usually indicates an exhaustion of the current trend and a potential market reversal.
In both cases above these false breakouts trapped long traders before collapsing back below the original breakout level. Once we see this type of price action develop, we can look to place our stops above the highs of the failed breakouts.
The reason behind this is simple. Since buy stops were already taken, the market should not trade back above this level if it is a true failed breakout.
If it does trade back above the highs, the short idea is no longer valid. In this scenario, it is more probable for the market to continue trading higher.
There are few things as frustrating as eating a stop loss when your analysis plays out to a tee.
With the tips you’ve learned in this article, you should stand a fighting chance against stop hunts in your trading.
We challenge you to apply these tips to your trading plan in order to find more success in the markets!
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.