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I had written about stoploss hunting sometime back.

Stop-loss hunting

This is one of those seemingly technical terms that is thrown around a lot but has no substance. This particular conspiracy theory was discussed on the TV panel mentioned earlier.

I have been in the business of trading and dealing with retail traders for two decades now. I’ve personally interacted with tens of thousands of traders in person, over e-mail, on online communities, and on our very active forums like TradingQ&A, Z-Connect, and Varsity. I can say with great certainty that the single biggest reason why retail traders lose money is by trading actively with no stop-loss to the trading strategy. Many claim to make a mental note of the stop-loss, but only a few actually place stop-loss orders. And the majority of those few who do, cancel or modify as the price starts closing in on the stop-loss. So, in reality, the significant majority never really have a real stop in place when trading. So if there is no stop, what can someone really “hunt”?

Secondly, over 80% of all trades today are on extremely liquid Nifty and Banknifty contracts. Assume Nifty is at 11010, and you get to know that at 10990 there are a lot of stop-loss orders. What can you do about it? Somehow magically take the market down by 20 points, fill those orders, and then take it back up? Even if someone did have deep enough pockets to move the price to a stop, how could this possibly be a profitable trading strategy in a market where there are lakhs of traders with different views, big and small, where no one person can control the direction of the market?

The only place where “stop-loss hunting” or forcing clients out of positions is profitable is again on a CFD / Binary trading platform, where the platform is the counterparty to every client position. The platform can potentially hit any manual stop in place or push the price to the extent where the risk management system auto squares off positions for insufficient margins. This is the reason why most of these platforms give extreme 100 to 200 times leverage to trade.

On a regulated exchange platform, this isn’t possible. Exchanges also have alert mechanisms that trigger anytime the buyer and seller on both entry and exit trades are the same clients. This immediately gets escalated and the broker is required to provide an explanation. There are severe penalties and regulatory ramifications for such activities.

Tick by Tick (TBT) feeds: Finally, stock exchanges provide what is called tick by tick (TBT) data feed where you can track every single order, trade, any modification happening on the exchange. This data contains details of trades and pending orders at the exchange level, across all brokers. So if someone did have a strategy like “stop-loss hunting”, trying to figure out retail orders, etc, the best option would be to subscribe to exchange TBT data feed. It’s quite complex and expensive, but available to anyone, and is offered by almost all Indian and global exchanges.

But there are frauds that happen in the market:

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