Stop Hunting: How to Avoid Being Stop Hunted by “Whales”

Stop hunting is a technique implemented by large traders who use the mechanics of the stop-loss order to help propel their position to profit. Additionally, stop hunting forces smaller traders out of a position and gives larger traders momentum behind their trades.

Stop hunting requires the use of stop-loss orders, which are converted to market order when triggered. The eventual market orders can create fast-moving markets, giving the crypto whales a quick win.

There are three strategies a trader can follow when they fear being stop hunted. These strategies require the use of a stop-loss order in conservatively placed spots on the chart. 

What Is Stop Hunting?

Stop hunting is a trading strategy that involves large traders pushing the market to trigger the stop-loss orders of other traders. The stop-loss orders force those traders out of their positions. Once those orders are cleared, the market reverses.

Stop hunting is a strategy that large (or “whale”) traders employ in financial markets like forex and crypto. When these whales see a cluster of stop-loss orders resting near the same price location, they push the market through the orders, forcing the participants out of their positions. This strategy becomes even more effective when leverage is involved, as the size of the market trades is magnified.

After an effective stop hunt is completed, the whales then begin to close out their position and the trend reverses. This is especially aggravating to retail traders, who are forced out of their positions — only to see the market reverse and trend in the direction they had initially analyzed.

The Correlation of Stop Hunting and Stop-Loss Orders

The key ingredients for a successful stop hunt include a cluster of stop-loss orders resting together, plus large whale traders.

Stop-loss hunting starts with the cluster of stop-loss orders resting together near the same market price.

For example, if we look at the Bitcoin chart above, we’ll see the downtrend in May 2021 stopped at $29,800. Traders might see the bounce higher, go long, and place their stop-loss just below support around $29,750–$30,000. Then, a couple of days later, the price twice retraces back to near $31,000. These traders are likely to buy and place their stop-loss orders in the same $29,750–$30,000 price zone.

A cluster of stop-loss orders is now building in a similar price zone of $29,750–$30,000. A large whale could enter the picture and push the price down to $29,000–$30,000, triggering the stop-loss orders. Those stop-loss orders would then force the traders out of the market, and the whale would close their short position, after which they need to buy back the asset. That buying pressure in turn begins to fuel the next rally. The retail trader’s stop-loss is triggered, and the market rallies — in the direction the trader had originally anticipated.

How a Stop-Loss Order Works — and Its Importance to Stop Hunting

Stop hunting works due to the mechanics of how stop-loss orders operate. Let’s assume a trader places a stop-loss order for a long Bitcoin position at $30,000. When the market hits $30,000, the order will trigger and convert into an order to sell at the current market price (market order).

The potential problem with market orders is the market might be moving so fast that the price changes before execution. We’re talking about fractions of a second, but by the time the stop-loss order converts and is sent off to sell at the market, the pricing could change. In a fast-moving market, the market order may be at a worse price than expected.

It would be like going to Walmart to buy a television, and by the time you haul the TV to the checkout counter, the price has increased. A similar thing happens within live markets: the price can be moving so fast that it falls further before an order can be executed.

To exacerbate the situation, when you have a cluster of stop-loss orders in a similar price zone, they become a future supply of sellers. As a result, there is an abundance of sellers — and very few buyers. Therefore, when these selling orders hit the market, there aren’t any buyers present to soak up the selling orders, and the market quickly readjusts to lower prices.

Once the stop-loss orders are absorbed, the balance of buyers and sellers begins to shift, resulting in a reduced number of sellers with a lot of buy orders nearby. The market then rallies swiftly. The whole scenario creates a volatile trading environment as prices adjust and seek out their equilibrium. 

How Do I Know I’m Being Stop Hunted?

As with so many things, you won’t know for sure that you’ve been stop hunted until after the fact. The ex post facto evidence of stop-loss hunting becomes apparent when you have a false breakout of support or resistance, only to see prices swiftly reverse.

In addition to the false break, you’ll likely see an increase in trading volume. First, you have the whale adding a lot of volume to push the market. Second, loads of stop losses get triggered, converting into market orders to sell. Then, on the reversal of prices, the whales are closing out their short positions, which is adding more buying pressure to the market.

These types of conditions are volatile and quick. It’s very difficult for a small trader to successfully navigate these whale-infested waters — unless the trader has anticipated the setup and traded accordingly.

How to Use Stop-Loss to Avoid Stop Hunting

The good news is that when you know how a stop hunt works, you can employ strategies to prevent being hunted in the first place.

Remember, one of the key ingredients to stop hunting is a cluster of stop-loss orders near a similar price. Stop-loss orders might be clustered together for two reasons:

1. The market’s pattern points people to place a stop-loss near similar levels.
2. Traders place stop-losses at round price numbers for ease of remembering.

The market’s price history and patterns may drive many traders to view the market from a similar perspective.

Take, for example, Bitcoin. On the 2-hour chart above, Bitcoin trades sideways, with clearly defined support and resistance levels, between March and April 2021. Traders who have spotted this pattern would use the range to buy at the bottom of it, and then sell at the top.

As the price approaches the support zone near $56,500–$57,500, traders would buy and place their stop-losses just below this zone. On April 7, 2021, Bitcoin’s price pushes through the buy zone, triggering the stop-loss orders. After the selling stops a few hours later, Bitcoin’s price rallies higher.

This stop-hunting scenario has been created due to the market’s pattern.

Secondly, when the market’s structure and patterns appear near round price numbers, that leads to stop hunting, too. In May 2021, support for Bitcoin emerged near $30,000. Therefore, traders who were long may have set a stop-loss near $30,000 simply because it was easier to remember.

Let’s go over three strategies to lessen the risk of your crypto trade being stop hunted.

Strategy 1: Finding Stop-Loss Orders

Look for areas on the chart where stop-losses tend to be clustered. The market’s patterns will help you identify these potential victims. Stand back from your chart and look for the most obvious pattern that comes to mind. Patterns which involve horizontal support and resistance are where you’ll typically find the hunted.

On the Ethereum chart above, we see a mini-downtrend developing after a huge rise of 2,200% over the preceding 12 months. Traders are anxious to jump into Ethereum, and this mini-downtrend opens the door. After a quick rally higher, traders would be eager to jump into this powerful trend and likely would place their stop-losses near the recent low at support.

Ethereum prices then come back to retest the lows. As the price approaches the lows, whales sell, pushing the price down through support — and ringing all of the stop-losses. Once the stop-losses are cleared out, the whales close their short position. Ethereum then continues its rally to new all-time highs.

The first strategy to avoid the stop hunt is to know where others are most likely to place their stop-losses. Armed with this information, you want to make sure you place your stop-loss BELOW where most traders would in a stop hunt. When placing the stop-loss appropriately, the market doesn’t move far enough to hit your level.

Strategy 2: Avoid Round Number Prices for Stop Losses

Earlier, we saw how traders like to place their stop-losses on round numbers. They do this so they can easily remember where their risk is set as they glance at prices later on in the day.

Knowing that round numbers may psychologically be a breeding ground for stop hunting, place your stop-loss far enough away to prevent stop hunting from affecting you.

For example, if you’re looking to buy Bitcoin near the $30,000 support, place your stop-loss far enough away that you’re protected — but not so far that you’ll be knocked out during a false break lower. Bitcoin has been known to move 5% and even 10% or more on a given day.

As an example, if we look further left on the chart, we can see additional support just below the round number of $30,000. This is a clue that our stop-loss needs to be much lower than the round number.

Therefore, place the stop-loss about 10% away, and not on a round number. A stop-loss around 27,360, for example, is about 10% away, and doesn’t invite another “round number” stop hunt.

Strategy 3: Give Your Trade Enough Room to Breathe

Pause, and watch your breathing for a moment. Do you notice how much your belly and/or chest move in and out while you breathe?

Well, the market has its rhythms as well. If you place your stop-loss too close, then the normal market rhythms and attempts at stop hunting will catch you.

The easiest way to determine the market’s rhythms is with the average true range (ATR) indicator.

Apply this indicator to the bottom of your chart on a 14-period input setting to gain a sense of the average movements for the last 14 periods. The output of the indicator will be a number in units of price. If you’re trading a large-cap cryptocurrency like Bitcoin or Ethereum, then 1× the ATR output is how far you would want to place your stop below support.

If you’re trading a small-cap cryptocurrency, then the risk of a stop hunt is greater. Therefore, you’ll want to consider your stop placement 2× below support.

Using LINK as an example, above, if you’re interested in buying where the arrow is, ATR is at $1.80. Since LINK is a smaller cryptocurrency, consider twice that amount, or $3.60, of stop-loss below recent lows. This would place the suggested stop-loss far enough away to prevent it from being hunted.

The Bottom Line

Stop hunting is a strategy utilized by crypto whales to pick up short-term gains. The whales use their financial backing to push the market to a cluster of stop-losses, forcing smaller traders out of their positions. Additionally, the cluster of stop-losses is a future pool of sellers, which then helps these whales in their short positions.

There are several strategies, described above, that you can deploy to help protect you from stop hunting. Using ATR to place your stop-loss far enough away from support so that the whales can’t reach you is the most conservative approach.