What is stop hunting?
Stop hunting can be an effective trading tactic. But what is stop hunting and what effect can it have on markets?
When it comes to trading cryptocurrencies, there are many different types of players on the markets and exchanges. Some are relative neophytes who are trying to get in early, while others are trying to take advantage of the price volatility to turn a quick buck. And there are institutional investors who are applying some of the same strategies they use in traditional markets. One of the tactics some traders use is stop hunting.
Price volatility is a feature of many different markets, not just cryptocurrency markets. One of the things people try to do is mitigate potential losses when prices fall below a certain level. The tool they use to do this is called a "stop-loss order". Its name is perfectly descriptive.
A stop-loss order is an instruction to sell something when the price falls to a certain level. For example, let's say you bought a potato as an investment for $5. Over time, the value of your potato rises to $7 – happy days! But, in order to protect your investment, you tell your potato broker to sell your potato if the price falls to $6.
That order to your broker (or software in an automated trading system) is called a stop-loss order.
Stop hunting is a market tactic used to force the price of an asset down to a certain level in order to activate lots of stop-loss orders.
So, in our potato market, someone with a large holding of potatoes might choose to sell a large number of potatoes. This creates a market surplus which results in a fall in the value of potatoes. This fall triggers lots of stop-loss orders, which brings more potatoes onto the market, enabling parties who sold their potatoes before the price hit a low point to now buy lots of potatoes at a lower price than before.
In other words, stop hunting is a tactic used to push prices of an item being traded in a market down so that more items become available at a lower price with the expectation that prices will rise again.
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