What's the purpose of stop hunting?

Discussion in 'Trading' started by SomeYoungGuy, Feb 5, 2010.

  1. I know it's a zero sum game, and when I lose that means somebody else won. But why do people stop-hunt? There must be profit in it because I can't believe that anybody's purpose would be to make me lose money while losing money themselves.

    If we are talking about a forex bucket shop, of course, but what about exchange traded equities and futures? Can someone explain how hunting a stop earns money?
  2. F112358


    We buy ahead of your buy stops and sell to you.

    We sell ahead of your sell stops and buy from you.

    We win and you lose. Very simple.
  3. Sure. Example:
    - current price is bid25.16/ask25.17
    - one cent ticks
    - there's a known 100 contract buy stop at 25.18
    - ask size at 25.17 is 10 contracts
    - ask size at 25.18 is an additional 10 contracts
    - ask size at 25.19 is an additional 10 contracts

    If I enter the following series of orders, I profit:
    - sell 11 limit 25.19 (doesn't execute yet)
    - buy 10 limit 25.17
    - buy 1 limit 25.18 (triggers stop)

    now the stop converts to buying 100 at market, which consumes the remaining nine contracts at 25.18, the 10 at 25.19 that are ahead of me, my 11 for sale, and an additional 70 past that. I make .02 on 10 contracts and .01 on one. Of course, I could increase my results by moving my limit sell price up farther if the market continued to be thin at higher prices, but this is a simplified example.
  4. Adding to BigD’s

    There are areas where there will be a cluster of stops

    Lets take BD’s example and the 100 buys stop was a collection of smaller orders.

    If we are in a pullback on a down trending channel, they could sacrifice the 11 contracts and enter/add to a larger short position (not just 19 contracts as in the example), improving their average price, this may be the high volume bar at the peak of any small reversal.

    Also once a person gets stopped out and they miss a move they are more emotional and more prone to chasing and errors, they place more vulnerable stops, the cycle continues

  5. Because forcing many stop losses may generally lead to high volatility and can present a unique opportunity for investors who are seeking potential trading opportunities.