Traders Are Hunting Down Your Trailing Stops

Trailing stops assume that intraday prices are real instead of sometimes just being part of a larger puzzle. That puzzle could be someone who is trying to manipulate a stock’s price to get some other asset’s price to move.

In other words, if you think of stock trading as a chess game, it’s a game that’s gotten faster, more complicated and the odds are stacked against you. In fact, algorithmic and artificial intelligence-based traders use retail investors’ trailing stops as a way to accumulate cheap shares.

For example, the website says:

Stop-loss hunting (also known as “stop runs”) refers to a situation in which some market participants attempt to manipulate, or push, the price of an asset and drive it to a level where other participants have set their stop-losses. When the price reaches these levels, these stop-loss orders are triggered, and market volatility increases.

Since trailing stop-losses are based off the latest market price, most people’s stop-losses are at very predictable levels, such as at 10% or 15% from the last price. But these numbers are incredibly easy to game.

In other words, people using trailing stops are an explicit target of manipulation today. And to me, it’s a way of getting stopped out of stocks that in many cases are just going to be down for a few seconds. Then a few seconds or minutes later, the stocks soar higher.

This is why I don’t use trailing stops in my services. Instead, we use a regular stop-loss.

A regular stop-loss means you sell when the stock goes below a set percent from your original cost based on the closing price of the stock. I believe this is a better system than trailing stops because closing prices are harder to manipulate.

Also, because each person’s cost is different, each person’s stop-loss is different. That means there’s no easy level at which you can be hunted down for your stop-loss price.

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