What is liquidation hunting?
How to get protection from it?
### How Liquidation Hunting Works ❗️
1. **Identify Stop-Loss Clusters: Traders or institutions analyze market data to identify price levels with a high concentration of stop-loss orders or margin levels.
2. **Manipulate the Market: Large traders (often with substantial capital) push the asset's price toward these identified levels.
3. **Trigger Liquidations: Once the price hits these levels, the stop-loss orders are triggered, causing a cascade of sell orders (or buy orders in the case of short positions) that drive the price further in the desired direction.
### Protection Strategies
To protect against liquidation hunting, traders can employ several strategies:
1. **Wider Stop-Loss Orders: Placing stop-loss orders further away from current market prices can reduce the likelihood of being caught in short-term price manipulations. However, this increases the potential loss if the market moves against you significantly.
2. **Manual Monitoring**: Actively monitor your trades and adjust stop-loss levels based on market conditions rather than setting them and leaving them unattended.
3. **Limit Position Sizes: Keeping position sizes smaller can reduce the risk of significant losses and make it less likely for your positions to be targeted by manipulators.
4. **Use Alerts: Set price alerts rather than stop-loss orders to manually decide whether to close a position based on current market conditions and sentiment.
5. **Diversify Trades: Avoid concentrating large trades in a single asset or market to mitigate the risk of manipulation in one market affecting your overall portfolio.
6. **Be Aware of Market Patterns: Understanding common price manipulation patterns and avoiding placing stop-loss orders at obvious levels (e.g., round numbers, support, and resistance levels) can reduce the likelihood of being targeted.
By combining these strategies, traders can better protect themselves from the adverse effects of liquidation hunting and enhance their overall trading resilience.