“Dad, I like that Power Rangers toy. Can you please buy it for me?”
Yes, I grew up with Power Rangers, Teenage Mutant Ninja Turtles and the like. My request for toys were often rejected and I grew to understand the reason why – money is hard to earn, but easy to spend.
We need to be disciplined and smart in spending our money, and the same can be said in the stock market.
Stop loss hunting happens all the time. This is the reason why your stop loss level has been triggered before the stock soars without you. Have you been careless with your stop loss?
#1 What Is Stop Loss Hunting
Stop loss hunting is the act of pushing prices lower in a bull market to trigger the stop loss orders of market participants. This is done to shake out novice traders and allow experienced traders to build up their portfolio.
Can you spot the stop loss hunting that took place in May and July?
It’s the reverse in a bear market. Prices are pushed higher in a bear market to trigger the stop loss orders of market participants. This is also done to shake out novice traders and allow experienced traders to short-sell at a better price.
Can you spot the stop loss hunting that took place in late June?
#2 How Does Stop Loss Hunting Work
To better understand how stop loss hunting works, you’ll need to understand the dynamics of the stock market.
The stock market is made up of institutional investors (aka big boys) and retail investors (people like you and I). This means that we don’t have the ability to sway the stock market as we wish. We got to be more prudent to stay in this business of stock trading.
The big boys have hundreds of millions or even billions to buy a single stock. They can easily buy hundreds of thousands shares of a company, moving the prices in the stock market with their massive funds. This is significant because when the big boys are out shopping, they want to buy stocks at a “discount” or sell-short at the top.
The big boys is full of experienced traders. They know where most of the stop loss levels are placed at. When they are looking to enter the stock market while it’s rising, they will sell the shares they have to realize their gains and press prices down. This is when the novice traders are stopped out.
Once this happens, the big boys resume their buying, and this explains the reason why your stop loss level has been triggered before the stock soars without you.
#3 How Can You Prevent Your Stop Loss From Being Hunted
Most novice traders employ a very tight stop loss. Remember that you and I are retail investors? Our wealth cannot compete with the funds the big boys enjoy. Therefore, we cannot influence the stock market.
By employing a very tight stop loss, you’re telling the market to move in the direction you want or you’re out. This isn’t how the stock market works.
Won’t using a wider stop loss means larger losses? Yes and no.
Yes, using a wider stop loss will lead to larger losses if your strategy doesn’t have an edge and/or you are not well versed in technical analysis.
No, using a wider stop loss will not lead to larger losses if you know what you’re doing. You’ll save on commissions by only buying stocks with the greatest potential to rise in a bull market. By only buying stocks that have a high probability in making you money, the occasional losses can be easily covered by the gains you make.
#4 3 Tools Can You Use
Do you now know why your stop loss level has to be wider? Are there tools to help you identify levels to place your stop loss at?
Let’s find out!
You can use the Average True Range (ATR) indicator to help determine your stop loss level.
This is a free indicator which you can add to your chart.
The ATR value will be shown on the right. It’s highly recommended that you set your stop loss level at 2x the ATR value or more. Remember that you’ll want to give the stock space and time to move instead of being stopped out prematurely, only for it to rise without you.
Here are 2 charts of Wells Fargo with the ATR indicator.
The next tool you can use to identify your stop loss level is by using support and resistance. You can learn about support and resistance in my previous article.
Are you thinking what I’m thinking?
Placing your stop loss level just under support or resistance is not going to be helpful. You’d be an easy target for the big boys.
You can combine support and resistance with the ATR indicator. Your stop loss level can be 1x the ATR value below the support or resistance as shown in the chart below.
This tool is a strategy which has been tested. This strategy is called the TPB Swing strategy.
The indicators are part of the TPB Swing strategy which are proprietary and formulated with decades worth of data.
By using the TPB Swing strategy, you’ll be notified on when and where to buy, learn where to place your stop loss level at, how to tell if a stock is strong, and more importantly how to find such strong stocks. The learning points don’t stop here.
Find out more about the TPB Swing strategy here.
3 Things You Must Remember
#1 The stock market can be moved by institutional investors
#2 We, retail investors, must be wiser and more prudent
#3 There are 3 tools you can use to prevent your stop loss from being hunted
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