Stop Loss Hunting is an unfair technique that causes individuals to get stopped out of their positions by driving the prices to a level where most of the traders have chosen to set their stop losses.
Also known as stop hunting, this is often done by market promoters or brokers to create fake volatility and momentum in the market, which in turn can be used to generate some quick profits.
Let’s take an example-
Suppose you enter long in stock at $100. Based on certain calculations you derived that $98 is the immediate support and place your stop-loss order at that level. You are very confident about the setup and waiting to see the profits coming in.
However, within a few minutes, your stop loss level is hit, the stock price goes further down for a fraction of time before it started moving up again. It crosses your original entry price and keeps accelerating.
I am sure this is a very common scenario every trader would have faced. But what exactly happened here?
The stop loss level ($98) was quite common and numerous traders would have chosen it for their trade. The promoters watching the market probably knew this fact and they decided to drive the prices to this SL level, which will trigger many Sell orders.
This in turn leads to high volatility in the market and lets the smart traders enter their positions.
In this post, we are going to look at a Stop Loss Hunter Trading System which lets you benefit from the volatility caused due to stop hunting. The system is built using Amibroker AFL and backtested on NSE:BANKNIFTY index.
Stop Loss Hunter Trading System – Overview
The system is based on the premise that moving average line is generally considered as a stop level. We have considered a 5-period simple moving average which can be changed as required.
This is a pure intraday system where if two consecutive candles touch the stop level and close above it, a BUY position is initiated. While if two consecutive candles touch the stop level and close below it, a SHORT position is triggered.
All the open positions are closed before the end of the trading day.
Below table summarizes all the system rules:
|Indicators Used||SMA, ADX|
|Sell Condition||Same as Short or Time >= 15:15|
|Cover Condition||Same as Buy or Time >= 15:15|
|Position Size||150 (fixed)|
|Brokerage||100 per order|
Stop Loss Hunter AFL Code
Download the AFL code from the below link. You may import this AFL in Amibroker and start using it.
Below are some screenshots from the Amibroker chart:
Stop Loss Hunter Trading System- Backtest Report
The system offers a great risk-reward ratio with limited drawdowns throughout the backtesting period. We have tested it on NSE:BANKNIFTY index but it should offer similar returns in any similar volatile instrument.
The annual CAGR of 39.38% is better than most of the system we have ever published.
|Scrip Name||NSE Banknifty|
|Backtest Period||01-Jan-2012 to 30-Jun-2020|
|Net Profit %||1580.28%|
|Annual Return %||39.38%|
|Number of Trades||1772|
|Winning Trade %||39.16%|
|Average holding Period||7.50 periods|
|Max consecutive losses||17|
|Max system % drawdown||-17.51%|
|Max Trade % drawdown||-22.85%|
Download the detailed backtest report here.
See below the equity curve of the system that represents how the capital grew over time
With an exception of 2017, this system has been consistently profitable every single year since 2012.
If you wanna learn and build your own Algorithmic trading systems like this, take a look at our structured courses at Trading Tuitions Academy
Additional Amibroker settings for backtesting
Goto Symbol–>Information, and specify the lot size and margin requirement. The below screenshot shows lot size of 25 and margin requirement of 10% for NSE BANKNIFTY:
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