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"Stop hunting" - a simple FOREX strategy

Today FOREX world is built around large leverage and constant use of margin, in equities, standard margin is set at 2:1, in options, the leverage increases to 10:1, in the futures market, the leverage factor is increased to 20:1, but in the FOREX market the leverage sets the highest bar by increasing to 100:1 ratio and can climb up to 200:1 meaning that you can invest $100 for a $20,000 value control! An experienced trader would limit his leverage to no more than 10:1.

Alongside leverage usage, or as in many FOREX rookies' cases using too much leverage, comes the opportunity for either extremely profitable or extraordinarily dangerous and huge loses. You can double your account overnight or lose it all in a matter of hours if you make use of the full margin at your disposal. Considering that fact, most FOREX traders use "stops" order / "stop-loss" - they simply do not have the luxury of nursing a losing trade for too long because their positions are highly leveraged, and here you can step in and take advantage of this knowledge.

Stop order in a nutshell is a form of insurance or security measure that is given to buy or sell when a currencies' price surpasses a particular point. Using stop loss is critical for long-term survival. By setting a predetermined entry or exit price, investors usually use this system to minimize their loses when off for the business day or any other situation in which they are unable to monitor their portfolio for an extended period.

The main FOREX strategy which takes advantage of this knowledge is "Stop Hunting" , which attempts to force some foreign currency exchange investors out of their positions by driving the price of a currency pair to a level where many investors have chosen to set their stop-loss orders (aka "weak longs"), by understanding that the human mind naturally seeks order, most stops are clustered around round numbers ending in "00" (i.e. if the EUR/USD pair was trading at 1.1380 and rising in value, most stops would reside within one or two points of the 1.1400 price point rather than, say, 1.1417). Absorbing that fact alone is priceless knowledge (the price of a currency pair can experience sharp moves when many stop losses are triggered); professional traders place their stops at less crowded and more unusual locations. The possibility of profit from these unique dynamics of the foreign currency market is huge and proven.

Probably you had seen this chart on your FOREX trading software and wondered what all those lines and measures mean.

Mia Milis is an independent trader and provides financial advice regarding foreign exchange to several institutions as well as private individuals. Being an Internet enthusiast, she has taken up to provide advice through her brilliant articles, and in recent years has also founded theforexblogger.com in order to provide a platform online traders worldwide could share experiences through.

Mia Milis is an independent trader and provides financial advice regarding foreign exchange to several institutions as well as private individuals. Being an Internet enthusiast, she has taken up to provide advice through her brilliant articles, and in recent years has also founded theforexblogger.com in order to provide a platform online traders worldwide could share experiences through.

FOREX charts: Moving Average Convergence-Divergence (MACD)

Probably you had seen this chart on your FOREX trading software and wondered what all those lines and measures mean. MACD is a chart that shows the average of the differences between two moving averages. On the charts you can see two lines on an open scale against the zero line, a fast one and a slow one. Those lines tells you the difference between the original two moving averages, and the moving average of the difference. On the chart each one of the two lines will be defined by a different color, or alternatively one line would be solid and the other one dotted. Frequently used settings are 12 and 26 period exponential moving averages with 9 period exponential moving averages as the signal line.

On the chart you'll see only two lines even though there are three moving averages mentioned. If the faster line crosses above the slower line then it is recommended that you buy, and vice versa. Another indicator this chart offers for FOREX users is that as long as both the lines are above the zero the more overbought the currency becomes, and as long as both lines are underneath the zero is the more oversold it would become. It may also lead to a stronger signal if the signal line crosses down when it is overbought and crosses up when it is oversold.

In case that the MACD is making new lows and the price of the security is not making new lows there is a divergence. Also, if the MACD has made a high and starts heading down yet price continues growing, it is clearly a bearish divergence and by using this information you can predict a change in the direction. MACD is commonly used as an indicator for divergence.

For conclusion MACD in a common tool FOREX traders and investors use for analysis and for forecasting the market's behavior. Using it wisely it can help you generate a nice profit.