Those who have already tried trading probably know what is stop loss hunting. It is when you enter the market on a good pattern, but your stop loss gets hit just by a few ticks/pips and then the market continues your way.
It is very common in all markets but it is probably best known in Forex. Basically it can occur for two reasons.
The first reason why stop loss hunting is happening is that big players are looking for liquidity to enter the markets. And because stop losses tend to be placed near important support/resistance levels, it is where the liquidity is. If big players manage to move the price to these levels, they know they will hit a lot of orders that can serve as counterparts for their own orders.
This way they can enter the market with big positions either for scalping or for longer trades without moving the price too much. It is something legitimate, unfortunately for small traders. But this how the markets work, ask and demand move the price.
The second reason why stop loss hunting occur is however not legitimate at all. Most of the Forex brokeres do not let you trade directly in Forex and they are market makers. It means that when you place a trade, it is not filled in the real market and your counterpart is not another trader. In this case your counterpart is your Forex broker. And here lies the problem. Your broker will make money only if you lose money. When you buy an asset, they sell it to you and vice versa.
That is why some of these brokers practice stop loss hunting. They manipulate the price in such a way so that you get stopped out and lose your trades. And this means that your broker makes money. You lost, he won. Even though it is not legal, there are many proofs on the internet that it is happening, some Forex brokers are scamming their clients.
How to avoid stop loss hunting? Trade binary options. As we already explained in Advantages of binary options trading, options are free of stop losses. The stop loss in binary options trading is the price of the option itself. Whatever the amount you invest in a binary option, you cannot lose more.
Let us return to the image above. If you would have placed the same trade on binary options, which means that you sell the option (put) with a long enough expiration time, you would make profit no matter how high the price would have jumped up. A typical expiration of 30 minutes would keep you safe and make you money.
Another advantage of trading binary options and not directly the underlying asset is that the market itself does not know about you. Your orders are not in the underlying market, so they are not to be seen and „asking“ for getting hit. So no matter how the market is being manipulated or not, you are away from it and safe.
Of course there is still the risk that your binary option broker can manipulate the price in its platform, but that is another topic that we will cover later. The simple solution to this is to choose a reliable broker.