Has this ever happened to you? Right when the market kicks you out, it all of a sudden drops 100 points in your favor, but you are not around to collect. You sir, have experienced a stophunt. In order to understand the concepts of the stop hunt, I provide you an example:
If you buy too much of anything, the price of it goes up, because the value and demand for that commodity increased. So say you were a commercial airliner, and you want to buy a $100,000,000 Jet from a different country. Different country means exchange rates. You only want to spend $100,000,000. Current rate is 4currency for every $1 USD. So obviously you just transfer all $100,000,000 to get 400,000,000currency, right? wrong!! As you dump more money into the pool, it becomes more and more expensive to make your transactions. Your $1usd for 4currency could now be 1 for every 3.8, then 1 for every 3.6, then 1 for every 3.4, etc til you exchange all your money, and instead of having 400,000,000currency to buy your jet, you only have 320,000,000.
So how can this be prevented? things like this happen because of LACK OF LIQUIDITY in the market. If you have no liquidity, price moves faaaaaassst. If you do, price is relatively stable. So in order to get their orders filled, the sharks will be looking for packets of liquidity in the market- stop losses and entry orders! Each of these are essentially little pockets that allow for sharks to add in their big orders- so when YOU get kicked out of the market, THEY IMMEDIATELY take that position using the freed up space you left behind.
So, in order to prevent stophunting, you have to
1) know where the orders are (or reasonably predict them. Avoid placing orders where a lot of orders are placed, because that would be just you setting yourself up to get kicked right out of a trade.
2) put your orders where the shark would. If you tend to get ‘stopped out’ before the big move, one suggestion would be as simple as putting your entry order where your stop is.
Give me a second, I will show you a picture of a stop hunt.
As you can see, I have labeled the stop hunt, which basically spiked up ~80 pips in the opposite direction, then rebounded within the same hour. Stop hunts are ALWAYS FOLLOWED BY A BIG MOVE.
You had a very bearish sentiment for the day, followed by a very strongly bearish catalyst right at the circled point. You short, but price immediately and rapidly spikes up against you, stopping you out. In my case, I had immediately realized a stophunt was in progress and re-entered, to catch the humongous move that dropped to the bottom of the picture.