How a Stop Loss Raid Works

Disclaimer: This post does not constitute financial advice. Do your own due diligence before making an investment.

Ever seen a stock drop 4-10% in a minute for seemingly no reason at all? If it wasn’t bad news, then it was probably a stop loss raid. Wall Street does this thousands of times a day. They do it for two reasons.

1. To make money shorting.

2. To steal your shares.

If you sell your shares during a stop loss raid, it could cost you a lot to get back in. So, the number one rule of quick price drops is: DON’T PANIC.

Here’s what a stop loss raid looks like.

We’ll look at several charts from Matinas Biopharma, a stock that recently released fantastic news and is clearly under accumulation by large funds.

Here’s the daily chart.

This company has been treading water for the past eight months. Investors waited patiently for trial data, and on September 13th were rewarded handsomely.

There are some red candles on the daily chart, but those aren’t stop loss raids. A stop loss raid is fast. It can start and finish in less than 10 minutes. Let’s zoom in a little.

Here’s the one-hour chart. Can you spot the stop loss raid?

If you said the hammer candle on 9/24, then you’re correct.

Let’s zoom in the five-minute chart and see what it looks like.

On 9/23, Matinas closed at $1.44. But when the market opened the next morning it was down to $1.42. This is not yet a stop loss raid. A bit of variance can be expected in all stocks. If you’re setting your stops at 2%, then they’re definitely going to be triggered. Most people set their stops around 7-10%. That’s about all the loss they can stomach. Unless you’re an options gambler and have normalized losing 50-100% of your investment, then 10% can seem like a lot.

Wall Street knows this. You should assume they know everything about you. They know what your salary is. They know what kind of car you drive. They know absolutely everything about your risk profile. They know more about you than your significant other does. This is because they buy the data you give away for free.

Everything you do on a device is being tracked, and some if it is being used against you.

Wall Street isn’t a place where people go to launch companies and make investments. Wall Street is a cartel of trading firms and one of their goals is to transfer money from the small investor’s pocket into the billionaire’s pocket. (Short-term trading is a zero-sum game.)

If your broker and exchange aren’t outright selling your stop loss information, or even using your stop loss levels to trade against you, then Wall Street probably knows where your stop loss is anyway. Even if it’s just in your head and you’re trading manually. They’ve been doing stop loss raids for decades. Wall Street knows exactly what dropping a stock price X% will do.

Drop it 1%, nothing happens.

Drop it 10%, volume triples.

Drop it 80% over nine months, and most plumbers, dentists, and chartered accountants will be forced (either by margin calls or by their significant others) into liquidating their shares.

Wall Street knows that small investors think on a short timeline. Wall Street invests for the next decade, but retail investors hold for less. Much less.

In 1940 small investors held their stocks for about seven years.

By 1987 it was down to two years.

By the financial crash in 2008, small investors were holding their stocks for less than eight months.

Over the last 80 years, Wall Street has perfected the art of tricking small investors into selling their winning lottery tickets for pennies on the dollar.

Let’s go back to chart. We’ll zoom in to the one-minute mark.

At 9:30 when the market opened everything was fine. The stock was down a bit and that’s okay. Stocks fluctuate in prices. Futures were red overnight and $SPY opened a bit lower than the night before.

At 9:34 there was an uptick in volume and the stock dropped to $1.40. That’s Wall Street testing the water. They’re trying to see how much damage they can do if they dump some shares. Not finding much support, they launched their attack at 9:37 by dumping more shares than had traded all day.

This stop loss raid sent the stock from $1.4059 all the way down to $1.31. This was a drop of almost 7% and it happened in the blink of an eye. The stock was down more than 9% from the previous day’s high.

People who use stop losses often move them as the stock price goes up. They do this after the market closes. So, if you had moved your Matinas stop up to $1.32, or -8.5%, then Wall Street would have stolen your shares.

We can tell it was a raid because less than eight minutes later the stock had largely recovered. At the end of the day it closed at $1.51, in the green by 4.86%. So, you can see how lucrative these raids can be. If you sold at $1.31 and bought back at the close, you would have paid a tax of 15%.

This was a stop-loss raid, but it wasn’t a great one. There wasn’t much selling after Wall Street nuked the stock to $1.31. Small investors bought the dip.

Why does Wall Street do this?

One of the reasons that Wall Street likes to trigger stops is because it can have a cascading affect. If you had set your stop at $1.31 and sold at market, then depending on how many shares you had, your selling could have further dropped the price .

The volume at 9:37 was only 320,000. That’s peanuts compared to the stock’s recent daily volume.

Imagine there was a dentist with 100,000 shares of Matinas and a stop loss at $1.31. The raid triggers their stop, selling their shares at market. The stock price drops to $1.29. At $1.29, there are two college professors and an anesthesiologist with 250,000 shares and that triggers their stop losses. They dump their shares, and the price continues to plummet.

Wall Street nukes a stock and buys back when the dust settles. Their selling started the collapse, but it was your selling that killed the share price. Wall Street knew this drop was coming (since they caused it) and they have big buy orders already placed.

If you had put a huge buy order at $1.31 before the market opened, your friends might think you’re crazy.

“The stock is at $1.44 and climbing every day. How’s it gonna drop to $1.31?”

The signs of a stop-loss raid are as follows:

1. A large, quick drop in stock price.

2. No news to explain the drop.

3. Volume jumps above normal.

4. More selling (successful raid) or a quick recovery (failed raid.)

If the raid is successful, then you could be in for some more pain. The more stops that trigger, the more selling there is. Since all of this happens in a flash, stocks can drop quite low, quite fast. They usually recover of course, since there’s no reason for the big drop.

(Be careful : just because there’s no news out, doesn’t mean someone isn’t trading on inside information. Sometimes a stock drops quickly and there is a good reason. Not every drop is a stop loss raid.)

The quicker the recovery, the more obvious a stop loss raid is. In the past, these raids would play out over a longer time period to hide the blatant manipulation, but Wall Street doesn’t seem to care about that anymore. Thousands of stocks are manipulated daily and the SEC seems powerless to stop them.

Wall Street gets away with this because they can always whip out a plausible explanation. “We shorted it because we thought it was less valuable relative to its peers.”

Or, “We shorted it because we don’t like the CEO,” or “We shorted it because our data shows that companies with goofy names underperform the market.”

Any baloney they invent will absolve them of market manipulation when it comes to a stop loss raid.

If the SEC wanted to put an end to stop loss raids there would need to be rules on how frequently someone (or their subsidiaries) can re-buy a stock after it’s been sold.

If you sell a ton of stock at 9:37, then to prevent market manipulation, you shouldn’t be allowed to rebuy it until at least the next day. Yes, this would take away freedoms, but these freedoms are being abused to steal money from small investors.

Unless Wall Street is regulated, then one day the bubble is going to pop. People will get so sick of the manipulation and the theft that they’re just not going to invest in individual stocks anymore. They’ll simply pile all their cash into index funds.

Oh wait. That’s already happening.

People who pick their own stocks these days are few and far between. We’re slowly going extinct as large funds destroy good companies and then buy them out for cheap. This means that even if you find a good company and hold forever, you can still lose. This is a tough pill to swallow.

A stop loss raid doesn’t have to affect you mentally or financially.

If you know what Wall Street is doing, then you can ignore it. It’s like when you were a child and scared of the monsters in the closet or under the bed. You could hear them scratching after the lights went out. Boards creaking. Windows rattling. The monsters were going to eat you alive and it was terrifying.

As you aged, you gained knowledge of the world and you decided not to believe in these monsters anymore. You ignored them and they went away.

This is what you must do during a stop loss raid. Stop looking at the stock. Close the chart, put down your phone, and go do something fun. Ignore this temporary bullshit and focus on the longer term. If your research shows the stock is going from $1.44 to $10, then who cares if it drops to $1.31 for a few minutes, or even a few days?

Good investing is about long term growth. Empires aren’t built in a day, and they certainly aren’t built watching the one-minute chart.

If you feel compelled to act during a stop loss raid, then instead of panic selling, link this article to others and help reassure them not to panic. The less everyone panics, the less the stock price will drop.

Wall Street only wins if they can trick you into selling. Like the monsters in your closet, Wall Street’s only weapon is fear. Your mind will go to dark places during a stop loss raid. You’ll conjure ideas like accounting fraud, or product recalls. You might even see the stock price going all the way to zero. But remember this: A stop loss raid won’t hurt you if you don’t believe in it. Wall Street doesn’t win unless you sell.

If it’s truly a stop loss raid and there’s no good reason for the drop, then your stock will eventually recover. Maybe even in the next eight minutes.

So buckle in and hold fast. Road are always bumpy before they’re paved.

Thanks for reading and good luck with your investments. Don’t forget to follow us on Twitter for more news and in-depth analysis.