I assume that many people are familiar with the situation when the price hits your stop loss and then moves in your direction and you realize that you lost money and you see the price go up. Yes, that hurts. I will reveal to you the four main reasons why this happens and how to avoid these mistakes. Let’s get started!
The first and most common mistake is that you have not checked the ATR (this is the volatility).
In a few words, a simple explanation: ATR is the distance between the high and low of each candle. It shows the average volatility each day. For example, for the British pound, at the time of writing, the average volatility over the past 10 days is 86 pips. This means that on average the British pound is moving 86 pips ninety percent of the time. That means that if the price is up 95 pips this morning and has attempted to break that range and you want to open an entry for a breakout, you have a stop loss hunt. Why? Because the full ATR is already broken. Maybe your idea is to trade a range breakout. That’s fine, but only if the price is ready to open (from overnight).
My advice is never to open a position to continue if the price is already up, for example, 80 ATR or more, because the possibility that the price will move one day more than one ATR is almost 10 percent. If you are betting on the percentage probability that price will continue to move in your direction, then know that the probability of such an outcome is extremely low.
The second reason for stop loss hunting is that you open a trade after a big move. You can open any chart, especially in а FX market, which is a range market, and you will see that it’s hard enough to find three or four days in a row when oil is rolling in one direction. As you can see, all markets have cycles. If you see that the price has already moved down, for example, five or six days in a row, it is not wise to open an entry to continue. If price has already moved down five days in a row without any decent pullback, range or accumulation, then there is a huge possibility of a pullback. You need to understand market cycles, because if you understand them you will have fewer stop losses.
The third reason you lose money on Stop Loss hunting is because you open a trade inside the range. What is important to understand is, if you open an entry inside the range and you expect it to be a good and «healthy» move without any pullbacks, for example, because we have an uptrend, but the price is inside the range, then this is big mistake why many people have a stop loss hunt. I mean, you have to open the entry at a very good place, at a strong level and at a good trend line.That’s why you need to learn how to trade within a range. How can you trade within a range? You can open a position from the boundaries of the range or after a range breakout, because that way it makes sense. If you always stick to a 5-minute, 10-minute, 15-minute chart, then open the big charts to see the whole picture. Sometimes you are just inside in a range, that’s all!
Finally, mistake number four is ignoring important news releases. It could be the European Central Bank announcing an interest rate, or the Federal Reserve announcing an interest rate as well, which I have used for robot trading, and at this point I know that most of the time price reacts to something that was unexpected. A great example: the British pound. Brexit was extremely unexpected news. To be honest, a lot of people didn’t believe that the British would vote to exit, but they did, and immediately the price went down a huge number of pips, which is 1707 pips, it was inside for a one-day candle, as you can see a large one-day candle and after that range and a real low. But, as you know, after that, the price started an uptrend for over a year from October 16 to April 18. Once again: something unexpected can create a powerful movement in the market. If the big players, the big banks, have already paid attention to this news, nothing will happen, it will not affect the price in any way because they have already taken this news into account.