In this article, we will go over the basic steps involved in buying and selling activities within financial markets like the stock market, crypto market, commodity market, and forex market. Whether it is the cash market or the derivatives market, many of us have witnessed something called “liquidity raids,” also known as stop hunting. We will explore how buying, selling, and stop hunting might be connected. This might be an eye-opener for you, so let’s get started!
Table of Contents
The Simple Idea Behind Buying and Selling
When you buy something, it happens because someone is selling it. In financial markets, this rule is always true. For a transaction to take place, there must be both a buyer and a seller. If you want to buy a stock, someone has to sell it to you, and when you want to sell a stock, someone must be there to buy it from you.
- If you take a “buy” position in the market, you eventually have to sell that stock to exit your position. This exit could be because you hit your target price or because your stop-loss order (a safety mechanism to limit losses) gets triggered. But remember, for you to sell your stock, there must be a buyer willing to purchase it.
- On the flip side, if you take a “sell” position (or short-sell), you will need to buy that stock back to close your position. Again, this could happen if you hit your target or if your stop-loss order is triggered. For you to buy that stock, someone needs to be selling it.
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What is Stop Hunting?
Sometimes, the market might move in the direction you expected, but it first triggers your stop-loss order, forcing you out of the market.
For example, imagine you’re bullish, meaning you expect prices to go up. But before that happens, the price might briefly drop and hit your stop-loss. When this happens, you sell your stock, and someone else buys it.
In many cases, big market players, also known as institutional traders, might be the ones buying that stock from you. These traders want their orders to be fulfilled by buying at the lowest price possible, and triggering stop-loss orders helps them do that. Once you’re out of the market, they sit in a winning position as the market moves in the expected direction.
Bulls and Bears
In financial markets, buyers are called bulls, and sellers are called bears.
- Bulls buy stocks expecting the price to rise.
- Bears sell stocks (or take short positions) expecting the price to fall.
Large players, whether they are bulls or bears, often try to build their positions quietly. They let the market move in a way that causes small investors (retail traders) to exit their positions. This allows the large players to buy or sell stocks at favorable prices.
For instance, big bulls might let the bears dominate the market just enough to trigger the stop-loss orders of retail traders. Once these smaller players exit, the big bulls swoop in, buy the stock at lower prices, and take a large bullish position.
Similarly, big bears may let the bulls push prices higher until they reach the point where early bears have placed their stop-loss orders. When those stop-loss orders are hit, the big bears take over, establishing a major bearish position at higher prices.
Key Insights: Price Preferences
- Buyers (Bulls) always prefer to buy at the lowest possible price.
- Sellers (Bears) prefer to sell at the highest possible price.
For big bulls, it’s a golden opportunity to buy at lower prices, especially where the stop-loss orders of smaller bulls are sitting. This allows them to enter bullish positions at favorable prices. Similarly, for big bears, it’s ideal to sell at higher prices, which often happens around the stop-loss levels of smaller bears.
Conclusion
- A bull’s exit happens when they sell their stock. They might sell it to a bigger bull who is entering the market at that point.
- A bear’s exit happens when they buy stock. They might buy it from a bigger bear who is waiting to sell at higher prices.
Whether you’re buying or selling, understanding how the big players move the market can give you a better idea of what’s really happening when you trade. It’s all about knowing that there’s always someone on the other side of your trade, and sometimes, that someone is a much bigger player.
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