What is Stop Hunting on Forex?Monday, 24 July 2017 12:29
Stop Hunting is one of the trading strategies on the Forex market. It consists of finding the areas where other traders placed their Stop Loss orders.
To consider this method in more detail, it’s necessary to understand some of the features of the foreign exchange market.
Stop Loss on Forex
The currency market has a number of differences from the stock market or futures. On the stock exchange, the leverage doesn’t exceed 2:1, and for futures and options this figure is 20:1 and 10:1, respectively. In case of Forex, the leverage can be 200:1, or even 500:1. This makes this market so attractive for traders, because with a leverage of 200: 1, having a deposit of $100, you can operate $20,000, provided by the broker.
Due to the high leverage, the trader gets an opportunity to earn much more, but his losses grow in a direct proportion. For such a reason, all the market participants use Stop Loss orders, which help to limit the loss of the transaction.
However, Stop Losses are used not only by the trader who opened the order, but also by other traders. Experienced traders, who have a lot of money at their deposit, use someone else's Stop Losses in order to throw players out of the market. Such large players include banks, investment funds, and other organizations with significant trade turnover. Using enough funds, these players direct the price towards the accumulations of stop orders, which trigger, and close other people's positions.
It’s quite easy to find the areas where traders will set most of the stop orders. Beginners, as a rule, put them near the round numbers, due to the peculiarities of a psychological perception. Stops also accumulate at the price levels that traders use within the same trading strategies.
Features of the Strategy
To master the trade using someone else's Stop Losses, you don’t need to be an experienced trader or have any special skills. Consider this tactic with an example.
- Draw two horizontal lines at a distance of 15 pips near the round value of the asset price. When the price chart comes into such a zone, a trade begins.
- If the bottom line breaks down, a buy order is opened. The Stop Loss is set at a distance of 15 pips. When the value reaches the integer number, it’s better to set the transaction to a break-even state.
- The Take Profit is placed on the top line. In case of a successful operation, you can earn 30 points on such a transaction.
Open deals only in the direction of the trend. Remember, this tactic is quite risky, so we recommend using additional tools to find the trend and filter noise.