The stop loss trap You will avoid the shake out trap if you understand the mechanics behind short selling. Hedge funds walk away with billions every year from hard working Canadians trying to prepare for their retirement. They place orders as little as 1 share (thanks to free commission trading) at decreasing prices until the price drops significantly enough to trigger stop loss orders that some unsuspecting retail investors automatically place to protect their downside. Example: I place 15 sell orders at strategic times (when liquidity is very low, at the beginning or end of the trading session…)
1- sell 50 shares at 1.97
2- sell 50 shares at 1.95
3- sell 50 shares at 1.94
4- sell 50 shares at 1.92
5- sell 50 shares at 1.91
6-sell 50 shares at 1.90
7-sell 10 shares at 1.88
8-sell 50 shares at 1.87
9-sell 50 shares at 1.85
10-sell 50 shares at 1.82
11-sell 50 shares at 1.81
12-sell 1 share at 1.80
13-sell 5 shares at 1.76
14-sell 50 shares at 1.75
15-sell 12 shares at 1.70
By sacrificing a few shares at a discount, hedge funds can trigger the sale of thousands if not millions of dormant shares owned by retail investors who naively placed stop loss orders on them. Brokers and short sellers are happy to scoop them up to cover their shorts and hoard some for when the stock starts rising up again.